[Federal Register Volume 63, Number 102 (Thursday, May 28, 1998)]
[Notices]
[Pages 29277-29282]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14113]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40017; File No. SR-CHX-98-09]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Partial Temporary Approval of Proposed Rule Change 
by the Chicago Stock Exchange, Incorporated Amending the SuperMAX and 
Enhanced SuperMAX Algorithms

May 20, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 20, 1998, 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 self-regulatory organization. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons and to grant accelerated approval, on a 
temporary basis, for a portion of the proposed rule change relating to 
a new SuperMAX algorithm.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend its SuperMAX and Enhanced SuperMAX 
programs, located in subsections (c) and (e) of Rule 37 of Article XX. 
Specifically, the Exchange is proposing new algorithms to provide price 
improvement under SuperMAX and Enhanced SuperMAX in \1/16\th point 
markets. Below is the text of the proposed rule change, additions are 
italicized; deletions are bracketed.
    (c) SuperMAX.
    [The Exchange's SuperMAX program shall be an automatic execution 
program within MAX in which a Specialist may voluntarily choose to 
participate on a stock-by-stock basis. A Specialist shall decide if his 
or her stock will be eligible for SuperMAX treatment. In the event that 
a Specialist determines that his stock is eligible for SuperMAX and 
voluntarily chooses to participate in SuperMAX, small agency market 
orders in that stock will automatically be executed in MAX, through the 
SuperMAX program, without any Specialist intervention based on the 
following criteria (for purposes of this Rule, small market orders 
shall mean orders up to and including 599 shares, except for the 500 
stocks listed in the

[[Page 29278]]

S&P 500<SUP>TM</SUP> Index, in which case, small market orders shall 
mean orders up to and including 1099 shares):
    (1) Pricing.
    (i) Both buy and sell orders in markets quoted with less than \1/4\ 
point spread or orders which do not meet the criteria in (ii) or (iii) 
below will be executed based on the ITS BBO.
    (ii) Buy orders in markets quoted with a \1/4\ point spread or 
wider will be executed at a price \1/8\th point better than the ITS 
Best Offer if (i) an execution at the ITS Best Offer would create a 
double up tick based upon the last sale in the primary market or (2) an 
execution at the ITS Best Offer would result in a greater than a \1/
8\th point price change from the last sale in the primary market.
    (iii) Sell orders in markets quoted with a \1/4\ point spread or 
wider will be executed at a price \1/8\th point better than the ITS 
Best Bid if (i) an execution at the ITS Best Bid would create a double 
down tick based upon the last sale in the primary market or (2) an 
execution at the ITS Best Bid would result in a greater than a \1/8\th 
point price change from the last sale in the primary market.
    For example, the execution price for a market buy order in a \1/4\-
\1/2\ quoted market is as follows:

------------------------------------------------------------------------
             Tick/last sale                      Execution price        
------------------------------------------------------------------------
+\1/2\.................................  \1/2\                          
+\3/8\.................................  \3/8\                          
-\3/8\.................................  \1/2\                          
-\1/4\.................................  \3/8\                          
+\1/4\.................................  \3/8\ (if in range)            
------------------------------------------------------------------------

    The execution price for a market buy order in a \1/4\-\5/8\ quoted 
market is as follows:

------------------------------------------------------------------------
                    Tick/last sale                      Execution price 
------------------------------------------------------------------------
+\5/8\...............................................              \5/8\
+\1/2\...............................................              \1/2\
\3/8\................................................              \1/2\
-\1/2\...............................................              \5/8\
-\3/8\...............................................              \1/2\
-\1/4\...............................................              \1/2\
+\1/4\...............................................              \1/2\
------------------------------------------------------------------------

    (2) Operating Time. SuperMAX will operate each day that the 
Exchange is open for trading from 8:45 a.m. (C.T.) until the close. 
During volatile periods, individual stocks or all stocks may be removed 
from SuperMAX with the approval of two members of the Committee on 
Floor Procedure.
    (3) Timing. Orders entered into SuperMAX shall be immediately 
executed without any delay (i.e. 0 seconds).
    (4) Applicability to Odd-Lots. Although an order generated by the 
Odd-Lot Execution Service (``OLES'') is a professional order (because 
it is deemed to be for the account of a broker-dealer), it is 
nonetheless eligible for SuperMAX execution if: (i) the issue is on 
SuperMAX, (ii) it is an order for 200 shares or less, and (iii) it is 
an OLES passively driven, system-generated market order (and not an 
actively managed order).
    (5) Other. Any eligible order in a stock included in SuperMAX which 
is manually presented at the Specialist post by a floor broker must 
also be guaranteed an execution by the Specialist pursuant to the 
criteria set forth in (1) above. In the event that a contra side order 
which would better a SuperMAX execution is presented at the post, the 
incoming order which is executed pursuant to the SuperMAX criteria must 
be adjusted to the better price.]
    SuperMAX shall be a voluntary automatic execution program within 
the MAX System. SuperMAX shall be available for Dual Trading System 
securities. Dual Trading System securities are securities that are 
traded on both the Exchange and either the New York Stock Exchange or 
the American Stock Exchange. A specialist may choose to enable this 
voluntary program within the MAX System on a security-by-security 
basis. In the event that the security is eligible for SuperMAX and the 
specialist in such security has chosen to engage SuperMAX for such 
security, small agency market orders in that security will 
automatically be executed in accordance with the SuperMAX algorithm, as 
set forth below. For purposes of this subsection (c), the term ``small 
agency market order'' shall mean an agency order from 100 shares up to 
and including 499 shares (or such greater amount specified by the 
specialist and approved by the Exchange).
    (1) Pricing.
    (i) In the event that a small agency market order to buy or sell is 
received in a security in which SuperMAX has been enabled, such order 
shall be executed at the ITS Best Offer (for a buy order) or ITS Best 
Bid (for a sell order) if (A) the spread between the ITS Best Bid and 
the ITS Best Offer in such security at the time the order is received 
is less than \1/8\<SUP>th</SUP> of a point, or (B) the order does not 
meet the criteria in (ii) below.
    (ii) In the event that a small agency market order to buy or sell 
is received in a security in which SuperMAX has been enabled, and the 
last primary market sale is at least 1/8th of a point lower than (for a 
buy order) or higher than (for a sell order) the ITS Best Offer (for a 
buy order) or the ITS Best Bid (for a sell order), such order shall be 
executed a \1/16\<SUP>th</SUP> of a point lower than the ITS Best Offer 
(for a buy order) or \1/16\<SUP>th</SUP> of a point higher than the ITS 
Best Bid (for a sell order).
    (2) Operating Time.
    SuperMAX will operate each day that the Exchange is open for 
trading from 8:45 a.m. (C.T.) until the close of the Primary trading 
Session. A specialist may enable or remove SuperMAX for a particular 
security only on one given day each month, as determined by the 
Exchange from time to time. Notwithstanding the previous sentence, 
during unusual market conditions, individual securities or all 
securities may be removed from SuperMAX with approval of two members of 
the Committee on Floor Procedure.
    (3) Timing.
    Orders entered into SuperMAX shall be immediately executed upon 
completion of the algorithm without any delay (i.e., 0 seconds).
    (4) Applicability to Odd-Lots.
    Although an order generated by the Odd-Lot Execution Service 
(``OLES'') is a professional order (because it is deemed to be for the 
account of a broker-dealer), it is nonetheless eligible for SuperMAX 
execution if: (i) the issue is on SuperMAX, (ii) it is an order for 200 
shares or less, and (iii) it is an OLES passively driven, system-
generated market order (and not an actively managed order).
    (5) Out of Range.
    Notwithstanding anything herein to the contrary, SuperMAX will not 
automatically execute an order if such execution would result in an out 
of range execution.
    (6) Other.
    Any eligible order in a security included in SuperMAX, which is 
manually presented at the Specialist post by a floor broker must also 
be guaranteed an execution by the Specialist pursuant to the criteria 
set forth in (1) above. In the event that a contra side order which 
would better a SuperMAX execution is presented at the post, the 
incoming order which is executed pursuant to the SuperMAX criteria must 
be adjusted to the better price.
    (d) No change in text.
    (e) Enhanced SuperMAX
    [The Exchange's Enhanced SuperMAX program shall be an automatic 
execution program within MAX in which a specialist may voluntarily 
choose to participate on a stock-by-stock basis. A specialist shall 
decide if his or her stock will be eligible for Enhanced SuperMAX 
treatment. In

[[Page 29279]]

the event that a stock is eligible for Enhanced SuperMAX treatment 
(pursuant to paragraph (e) of this Rule) and SuperMAX treatment 
(pursuant to paragraph (c) of this Rule) at the same time, the size of 
the order and the inclusion of the security in the S&P 500<SUP>TM</SUP> 
Index will determine which program will be followed for execution. If a 
stock is not included in the S&P 500<SUP>TM</SUP> Index, an order of 
299 shares or less will execute according to the SuperMAX program and 
an order from 300 shares up to and including 1099 shares (or such 
greater size specified by the specialist and approved by the Exchange) 
will execute according to the Enhanced SuperMAX program. If a stock is 
included in the S&P 500<SUP>TM</SUP> Index, or if a specialist in a 
non-S&P 500<SUP>TM</SUP> Index issue so chooses, an order of 599 shares 
or less will execute according to the SuperMAX program and an order 
from 600 shares up to and including 1099 shares (or such greater size 
specified by the specialist and approved by the Exchange) will execute 
according to the Enhanced SuperMAX program. In the event that a 
specialist determines that his stock is eligible for Enhanced SuperMAX 
only and voluntarily chooses to participate in Enhanced SuperMAX, 
agency market orders up to and including 1099 shares (or such greater 
size specified by a specialist and approved by the Exchange) in that 
stock may automatically be stopped and executed in MAX, through the 
Enhanced SuperMAX program, without any specialist intervention based on 
the following criteria:
    (1) Stopping. If an agency market order eligible for Enhanced 
SuperMAX would create either a double up tick (buy order) or double 
down tick (sell order) if the order was executed at the ITS BBO, the 
Enhanced SuperMAX program will ``stop'' the order. Once stopped, the 
order will not receive an execution that is worse than the stopped 
price. Notwithstanding anything in the previous sentence to the 
contrary, agency market orders in markets quoted in less and a \1/4\ 
point market will not be stopped. Orders not stopped will be 
immediately executed based upon the ITS BBO as the case may be.
    (2) Pricing. Buy orders stopped under (1) above will be executed as 
follows:
    (i) If the next primary market sale is equal to or less than the 
last sale then the stopped order will be executed at such last sale 
price (subject, however, to the Exchange's block protection policy as 
set forth in interpretation and policy .06 of Rule 7 of this Article).
    (ii) If the next primary market sale is greater than the last sale 
then the stopped order will be executed at such next primary market 
sale price. However, if the next primary market sale is greater than 
the stopped price then the stopped order will be filled at the stopped 
price.
    Sell orders stopped under (1) above will be executed as follows:
    (iii) If the next primary market sale is equal to or greater than 
the last sale then the stopped order will be executed at such last sale 
price (subject, however, to the Exchange's block protection policy as 
set forth in interpretation and policy .06 of Rule 7 of this Article).
    (iv) If the next primary market sale is less than the last sale 
then the stopped order will be executed at such primary market sale 
price. However, if the next primary market sale is less than the 
stopped price then the stopped order will be filled at the stopped 
price.
    Notwithstanding anything in this paragraph (2) to the contrary, 
orders stopped under this paragraph that are subject to a Time Out 
Period (as defined below) shall be executed at the stopped price if 
there are no executions in the primary market at the end of the 
applicable Time Out Period. The Time Out Period shall be the time 
specified by the specialist on a stock-by-stock basis based on the size 
of the order. Such Time Out Period may be changed by a specialist no 
more frequently than once a month and may be no less than 30 seconds. A 
specialist shall not be required to specify a Time Out Period. If no 
Time Out Period is specified, no Time Out Period shall apply.
    (3) Operating Time. Enhanced SuperMAX will operate each day that 
the Exchange is open for trading from 8:45 a.m. (C.T.) until the close. 
A specialist may make a particular stock eligible for Enhanced SuperMAX 
and may remove a particular stock from Enhanced SuperMAX only on one 
given day each month, as determined from time to time by the Exchange. 
Notwithstanding anything in the previous sentence to the contrary, in 
unusual trading situations, individual stocks or all stocks may be 
removed from Enhanced SuperMAX with the approval of two members of the 
Committee on Floor Procedure.
    (4) Timing. Orders entered into Enhanced SuperMAX shall, when due a 
fill under the Enhanced SuperMAX program, be immediately executed 
without any delay (i.e. 0 seconds).
    (5) Applicability to Odd-Lots. Although an order generated by the 
Odd-Lot Execution Service (``OLES'') is a professional order (because 
it is deemed to be for the account of a broker-dealer), it is 
nonetheless eligible for Enhanced SuperMAX execution if: (i) the issue 
is on Enhanced SuperMAX, (ii) it is an order for 200 shares or less, 
and (iii) it is an OLES passively drive, system-generated market order 
(and not an actively managed order).
    (6) Out of Range. Notwithstanding anything in this paragraph (e) to 
the contrary, Enhanced SuperMAX will not execute an order at the ITS 
BBO if such execution would result in an out of range execution.
    (7) Other. Any eligible order in a stock included in Enhanced 
SuperMAX which is manually presented at the Specialist post by a floor 
broker must also be guaranteed an execution by the Specialist pursuant 
to the criteria set forth in this paragraph (e). In the event that a 
contra side order which would better an Enhanced SuperMAX execution is 
presented at the post, the incoming order which is executed pursuant to 
the Enhanced SuperMAX criteria must be adjusted to the better price.]
    Enhanced SuperMAX shall be a voluntary automatic execution program 
within the MAX System. Enhanced SuperMAX shall be available for any 
Dual Trading System security in which SuperMAX has been enabled. A 
specialist may choose to enable this voluntary program within the MAX 
System on a security-by-security basis. In the event that the security 
is eligible for Enhanced SuperMAX and the specialist in such security 
has chosen to engage Enhanced SuperMAX for such security, small agency 
market orders in that security will automatically be executed in 
accordance with the Enhanced SuperMAX algorithm, as set forth below. 
For purposes of this subsection (e), the term ``small agency market 
order'' shall mean an agency order for at least 500 shares, up to and 
including 2099 shares (or such greater amount chosen by the specialist 
and approved by the Exchange). Notwithstanding the previous sentence, 
the smallest size order in a particular security that is eligible for 
Enhanced SuperMAX shall always be of a size that is at least one share 
greater than the largest size order in such security that is eligible 
for SuperMAX.
    (1) Stopping.
    (i) In the event that a small agency market order to buy or sell is 
received in a security in which Enhanced SuperMAX has been enabled, and 
both (A) the spread between the ITS Best Bid and the ITS Best Offer in 
such security at the time the order is received is equal to or greater 
than \3/16\th of a point, and (B) the last primary market sale is at 
least \1/8\th of a point lower than (for a buy order) or higher than 
(for a sell order) the ITS Best Offer (for a buy

[[Page 29280]]

order) or the ITS Best Bid (for a sell order), Enhanced SuperMAX shall 
``stop'' the order at the ITS Best Offer (for a buy order) or at the 
ITS Best Bid (for a sell order) for a Time Out Period (as defined 
below). Once stopped, the order shall be guaranteed an execution at the 
stopped price or better. The Time Out Period shall be the time 
specified by the specialist, and approved by the Exchange, on a 
security-by-security basis. Such Time Out Period may be changed by a 
specialist no more frequently than once a month and may be no less than 
30 seconds. If a specialist does not specify a specific Time Out 
Period, the Time Out Period shall be 30 seconds.
    (ii) In the event that a small agency market order to buy or sell 
is received in a security in which Enhanced SuperMAX has been enabled, 
and the order is not stopped under (1)(i) above, Enhanced SuperMAX 
shall immediately execute the order at the ITS Best Offer (for a buy 
order) or at the ITS Best Bid (for a sell order).
    (2) Pricing.
    (i) In the event that an order has been stopped in accordance with 
subsection (1)(i) above, it shall be executed at \1/16\th of a point 
better than the stopped price immediately after the first (i.e., next) 
primary market sale that occurs during the Time Out Period, but only if 
such next primary market sale is at least \1/8\th of a point lower than 
(for a buy order) or higher than (for a sell order) the stopped price.
    (ii) In the event that an order has been stopped in accordance with 
subsection (1)(i) above, it shall be executed at the stopped price 
immediately after the first (i.e., next) primary market sale that 
occurs during the Time Out Period, but only if such next primary market 
sale is less than \1/8\th of a point lower than (for a buy order) or 
higher than (for a sell order) the stopped price.
    (iii) in the event that an order has been stopped in accordance 
with subsection (1)(i) above, it shall be executed at the stopped price 
immediately at the end of the applicable Time Out Period if no sale of 
the security has occurred in the primary market during such Time Out 
Period.
    (3) Operating Time.
    Enhanced SuperMAX will operate each day that the Exchange is open 
for trading from 8:45 a.m. (C.T.) until the close of the Primary 
trading Session. A specialist may enable or remove Enhanced SuperMAX 
for a particular security only on one given day each month, as 
determined by the Exchange from time to time. Notwithstanding the 
previous sentence, during unusual market conditions, individual 
securities or all securities may be removed from Enhanced SuperMAX with 
approval of two members of the Committee on Floor Procedure.
    (4) Timing.
    Orders entered into Enhanced SuperMAX shall be immediately executed 
upon completion of the algorithm without any delay (i.e., 0 seconds).
    (5) Applicability to Odd-Lots.
    Although an order generated by the Odd-Lot Execution Service 
(``OLES'') is a professional order (because it is deemed to be for the 
account of a broker-dealer), it is nonetheless eligible for Enhanced 
SuperMAX execution if: (i) the issue is on Enhanced SuperMAX, (iii) it 
is an order for 200 shares or less, and (iii) it is an OLES passively 
driven, system-generated market order (and not an activity managed 
order).
    (6) Out of Range.
    Notwithstanding anything herein to the contrary, Enhanced SuperMAX 
will not automatically execute an order if such execution would result 
in an out of range execution.
    (7) Other.
    Any eligible order in a security included in Enhanced SuperMAX, 
which is manually presented at the Specialist post by a floor broker 
must also be guaranteed an execution by the Specialist pursuant to the 
criteria set forth in (1) and (2) above. In the event that a contra 
side order which would better a Enhanced SuperMAX execution is 
presented at the post, the incoming order which is executed pursuant to 
the Enhanced SuperMAX criteria must be adjusted to the better price.

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 on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III 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
    On May 22, 1995, the Commission approved a proposed rule change of 
the CHX that allows specialists on the Exchange, through the Exchange's 
MAX system, to provide order execution guarantees that are more 
favorable than those required under CHX Rule 37(a), Article XX.\2\ That 
approval order contemplated that the CHX would file with the Commission 
specific modifications to the parameters of MAX that are required to 
implement various options available under this new rule.
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    \2\ See Securities Exchange Act Release No. 35753 (May 22, 
1995), 60 FR 28007 (May 26, 1995) (File No. SR-CHX-95-08).
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    The CHX now proposes to amend the SuperMAX program and Enhanced 
SuperMAX programs. SuperMAX and Enhanced SuperMAX are two existing CHX 
programs within the MAX System that use computerized algorithms to 
provide automated price improvement. Both of these programs have been 
approved by the Commission on a permanent basis.\3\
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    \3\ See Securities Exchange Act Release No. 32631 (July 14, 
1993), 58 FR 39069 (July 21, 1993) (File No. SR-MSE-93-10) (Order 
approving SuperMAX on a permanent basis), Securities Exchange Act 
Release No. 38338 (February 26, 1997), 62 FR 10102 (March 5, 1997) 
(File No. SR-CHX-97-02) (Order approving Enhanced SuperMAX on a 
permanent basis).
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    Background. In 1997, virtually every registered national securities 
exchange and national securities association changed its minimum 
trading variation to one sixteenth of a point or smaller. Although the 
CHX made some technical changes to its SuperMAX and Enhanced SuperMAX 
programs at that time in light of assumptions as to the smallest 
minimum variation that were contained in the text of the SuperMAX and 
Enhanced SuperMAX rules, the CHX did not change the algorithms to 
reflect the additional price improvement opportunities that are 
available because of trading in sixteenths.\4\ The purpose of the 
proposed rule change is to amend the existing programs to both simplify 
the price improvement algorithms and increase the number of orders that 
are eligible for price improvement due to the smaller minimum trading 
variation. Rather than amending the existing text of the SuperMAX and 
Enhanced SuperMAX rules, the text of the existing rule has been deleted 
and replaced with new language. This was done to permit the Exchange to 
re-write the rule, with non-substantive changes, to clarify some 
language in the old rule that may have been ambiguous.
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    \4\ See Securities Exchange Act Release No. 38816 (July 3, 
1997), 62 FR 37325 (July 11, 1997) (File No. SR-CHX-97-18).
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    Proposal. The existing SuperMAX and Enhanced SuperMAX programs are 
voluntary programs in which a specialist may choose to participate. 
Participation is on a security-by-security

[[Page 29281]]

basis and is currently limited to Dual Trading System issues (i.e., 
issues traded on both the CHX and either the New York Stock Exchange or 
American Stock Exchange). A specialist can only activate and de-
activate the program with respect to a given security once a month (a 
date determined by the specialist). Once activated with respect to a 
security, small agency market orders \5\ in markets quoted with a 
spread of \1/4\ point or more are eligible for automated price 
improvement. Once eligible, the program runs through an algorithum that 
may provide price improvement under certain circumstances. The existing 
SuperMAX program provides price improvement to the order if executing 
the order at the ITS BBC \6\ (the ITS best offer for a buy order, and 
the ITS best bid for a sell order) would create either a double uptick 
or double down tick based on the last primary market sale. The program 
also provides price improvement if such an execution would result in 
greater than a \1/8\th point price change from the last primary market 
sale. Under the existing Enhanced SuperMAX program, rather than 
executing an order based on the last primary market sale, eligible 
orders are ``stopped'' at the ITS BBO and are executed with reference 
to the next primary market sale. The Enhanced SuperMAX program also 
includes a time-out feature whereby if there are no executions in the 
primary market after the order has been stopped for a designated time 
period, the order is executed at the stopped price at the end of such 
period. Such period, known as a time out period, is pre-selected by a 
specialist on a stock-by-stock basis on the size of the order, may be 
changed by a specialist no more frequently than once a month and may be 
no less than 30 seconds.
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    \5\ For SuperMAX, small agency market orders are orders from 100 
shares to 599 shares (or a greater amount chosen by the specialist). 
For Enhanced SuperMAX these are orders from 100 shares to 1099 
shares (or a greater amount chosen by the specialist).
    \6\ As used in the CHX rules, ITS BBO means the best bid or 
offer among the American, Boston, Cincinnati, Chicago, New York, 
Pacific, Philadelphia or the Intermarket Trading System/Computer 
Assisted Execution System quote. See CHX Art. XX, Rule 37(a)(2).
---------------------------------------------------------------------------

    This proposed rule change simplifies the pricing algorithms used by 
SuperMAX and Enhanced SuperMAX and provides a greater opportunity for 
price improvement.
    Under the new simplified algorithm for SuperMAX, small agency 
market orders \7\ would now be eligible for price improvement if the 
market for the security is quoted with a spread of \1/8\ of a point or 
greater (rather than the \1/4\ point spread that is required under the 
existing rule). In addition, the double-up/double down concept has been 
eliminated. The simplified algorithm will now provide 1\1/16\th of a 
point price improvement from the ITS BBO if an execution at the ITS BBO 
would be at least \1/8\th point higher than (for a buy order) or lower 
than (for a sell order) the last primary market sale. Basically price 
improvement is given under certain circumstances when the security is 
trading between the spread. All other aspects of the existing 
algorithm, including operating time, timing of execution, applicability 
to odd-lots, and out of range situations, remain the same.
---------------------------------------------------------------------------

    \7\ Under the proposal, small agency market orders for SuperMAX 
would be orders from 100 shares to 499 shares (or a greater amount 
chosen by the specialist).
---------------------------------------------------------------------------

    The Exchange has compared the proposed changes to SuperMAX with the 
existing SuperMAX algorithm and believes that the new algorithm will 
provide price improvement to a greater number of trades. Using data for 
January 1998, the Exchange determined that the proposed changes to the 
algorithm would have resulted in over 32,000 trades receiving price 
improvement (for a total savings of $329,000 to customers), as opposed 
to the 5800 trades that received price improvement (for a total savings 
of $126,000 to customers) under the existing SuperMAX program. This 
means that the changes to SuperMAX would have resulted in customers 
receiving 203,000 additional dollars of price improvement over the 
Exchange's existing SuperMAX algorithm.
    With respect to Enhanced SuperMAX, the Exchange proposes to make 
this program an add-on feature for securities for which the SuperMAX 
program has already been activated, rather than a stand-alone program. 
As stated in the Exchange's Report on the operation of the Enhanced 
SuperMAX program that was provided to the Commission in advance of the 
Commission's permanent approval of Enhanced SuperMAX program, taken as 
a whole, the existing SuperMAX program provides more price improvement 
than the existing Enhanced SuperMAX program. The Exchange believes that 
interconnecting the two programs will encourage more specialists to 
enable the SuperMAX program, with greater resulting price improvement, 
since the Enhanced SuperMAX program will only be available when 
SuperMAX is enabled. Currently, some specialists have only turned on 
the Enhanced SuperMAX program without enabling the SuperMAX program.
    Under the new simplified algorithm for Enhanced SuperMAX, small 
agency market orders \8\ would be eligible for price improvement if the 
market for the security is quoted with a spread of \3/16\<SUP>th</SUP> 
of a point (rather than the \1/4\ point spread that is required under 
the existing rule). In addition, the double-up/double down concept 
currently in place to determine whether an order is stopped has been 
eliminated. The simplified algorithm will now ``stop'' an eligible 
order at the ITS BBO if an execution at the ITS BBO would be at least 
\1/18\<SUP>th</SUP> point higher than (for a buy order) or lower than 
(for a sell order) the last primary market sale. (This stopping 
algorithm is identical to the new algorithm above for Super MAX.) Once 
stopped, an order would receive \1/16\<SUP>th</SUP> price improvement 
over the stopped price if the next primary market sale occurs before 
the end of the Time Out Period and the sale is at least \1/
8\<SUP>th</SUP> of a point lower than (for a buy order) or higher than 
(for a sell order) the stopped price. As is the case for SuperMAX, all 
other aspects of the existing algorithm, including operating time, 
timing of execution, applicability to odd-lots, and out of range 
situations, remain the same.
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    \8\ Under the proposal, small agency market orders for Enhanced 
SuperMAX would be orders from 500 shares to 2099 shares (or a 
greater amount chosen by the specialist). Notwithstanding the 500 
share minimum order size contained in the rule, the smallest size 
order eligible for Enhanced SuperMAX must always be at least one 
share greater than the largest size order in such security that is 
eligible for SuperMAX. In other words, if a specialist voluntarily 
increases the maximum order size for SuperMAX, the minimum order 
size for Enhanced SuperMAX must be increased accordingly.
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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. The proposed rule change 
accomplishes these ends by increasing the number of trades that will be 
eligible for automated price improvement.

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.

[[Page 29282]]

III. 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 D.C. 20549. 
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 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-98-09 and 
should be submitted by June 18, 1998.

IV. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the publication of the 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 such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

V. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that part of the Exchange's proposal modifying 
the price improvement algorithm amending SuperMAX is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange. Specifically, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\9\ which requires that the rules of an 
exchange be designed, among other things, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, 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.\10\ The Commission believes, 
in light of the industry's move to trading in finer increments last 
year, that CHX's modification to its price improvement algorithms will 
provide investors a meaningful opportunity for price improvement when 
securities trading in \1/16\ths have a spread of \1/8\ point or 
greater. In addition, the Commission finds that the new SuperMAX and 
Enhanced SuperMAX rules provide greater price improvement opportunities 
for investors because the criteria for when such opportunities are 
available has been simplified. The Commission believes that because the 
opportunity for price improvement is automatic and without any 
specialist intervention, SuperMAX \11\ and Enhanced SuperMAX facilitate 
order interaction and enhance the execution of customer orders 
consistent with Section 6(b)(5) of the Act. The Commission notes that 
while SuperMAX and Enhanced SuperMAX are voluntary programs that 
specialists choose to participate in for Dual Trading Systems issues, 
providing a greater number of investors an opportunity to achieve price 
improvement is compatible with the view expressed in the Order Handling 
release.\12\
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    \9\ 15 U.S.C. 78f(b)(5).
    \10\ In approving this rule, the Commission notes that it has 
also considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \11\ The CHX presently has the ability to install the new 
SuperMAX algorithm.
    \12\ See Securities Exchange Act Release No. 37619A (September 
6, 1996), 61 FR 48290 (September 12, 1996).
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    The Commission therefore finds good cause for granting partial 
approval to the proposed rule change (SR-CHX-98-09) with respect to the 
adoption of a new SuperMAX prior to the thirtieth day after date of 
publication of notice of filing thereof in the Federal Register. The 
Commission is granting this partial approval on a temporary basis, 
until August 20, 1998.
    The Commission is therefore granting accelerated approval for the 
new SuperMAX algorithm on a temporary basis, until August 20, 1998.\13\ 
The Commission is deferring action on the new Enhanced SuperMAX to 
provide interested parties an opportunity to comment on the proposal. 
In addition, the Commission and the CHX will have the opportunity to 
review the implementation of the new SuperMAX algorithm.
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    \13\ The proposal to permanently adopt the new SuperMAX will be 
considered with the proposal to approve the adoption of the new 
Enhanced SuperMAX.
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    The changes to the SuperMAX algorithm will be phased in during the 
next month. Until the Enhanced SuperMAX proposal is adopted, the 
existing Enhanced SuperMAX algorithm will continue to apply. In those 
instances where a security is both on the new SuperMAX algorithm and 
the old Enhanced SuperMAX algorithm, the size of the order will 
determine which algorithm is used. The introductory paragraph of 
existing Rule 37(e) that describes the interaction between SuperMAX and 
Enhanced SuperMAX for a security on both systems shall be deemed to be 
amended such that if an order is for between 100 shares and 499 shares, 
the new SuperMAX algorithm shall apply, and if the order is for 500 
shares or more (up to the 2099 shares or such greater amount specified 
by the specialist and approved by the Exchange), the old Enhanced 
SuperMAX algorithm shall apply.
    It is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-CHX-98-09) be, and hereby 
is, approved in part and on a temporary basis.

    \14\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(1)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-14113 Filed 5-27-98; 8:45 am]
BILLING CODE 8010-01-M