Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Notices 29277

5 15 U.S.C. 78f(b) and 78k(b).

6 15 U.S.C. 78f(b)(5).

7 17 CFR 240.11b–1.

8Under Article XXXIV, Rule 16, registered market

makers are registered as specialists for purposes of

the Act.

9For example, under Article XXXIV, a registered

market maker on the Exchange has the duty to

maintain fair and orderly markets in assigned issues

(Rule 1); the duty to execute at least 50% of

quarterly share volume in assigned issues (Rule 3);

and the duty to register separately for each security

to be traded as a market maker (Rule 4).

10Under the federal securities laws and the

Exchange’s Rules as set forth in Article XXXIV,

market makers are also granted special treatment

and exemptions from requirements regarding net

capital, position financing, and short sales for

transaction effected during the course of bona fide

market making.

11 In approving the rule change, the Commission

has considered the proposed rule’s impact on

efficiency, competition and capital formation. 15

U.S.C. 78c(f).

12 15 U.S.C. 78s(b).

13 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1).

on the Exchange or sent from the

Exchange floor via ITS in determining a

market maker’s ability to use exempt

credit.

In providing assistance in maintaining

a fair and orderly market, a market

maker may be required to decrease

either a long or a short position in a

particular security. Consequently, a

market maker may, from time to time,

engage in transactions that decrease its

position. These transactions were not

previously included in the calculation

of transactions that qualify for exempt

credit. The proposed rule change

amends Interpretation .01 to Article

XXXIV, Rule 16 to note that positions

that decrease a position in a market

maker account will be treated the same

way as those that create or increase a

position for purposes of determining

whether a market maker has satisfied

the 50% volume requirements needed to

obtain exempt credit.

III. Discussion

After careful review, the Commission

finds that the proposed rule change is

consistent with Sections 6(b) and 11(b)

of the Act.5 In particular, the

Commission believes the proposal is

consistent with the Section 6(b)(5) 6

requirements that the rules of an

exchange be designed to promote just

and equitable principles of trade, to

remove impediments to and perfect the

mechanism of a free and open market

and a national market system and, in

general, to protect investors and the

public interest. The Commission

believes, moreover, that the proposed

rule change is consistent with the

requirements of Section 11(b) and Rule

11b–1 thereunder 7 that specialist (i.e.,

market maker) 8 transactions contribute

to the maintenance of fair and orderly

markets.

The Commission believes that

registered market makers on the

Exchange serve an important function

inasmuch as they add depth and

liquidity to the market for CHX-traded

securities. Pursuant to Article XXXIV of

the CHX Rules, market makers are

subject to both affirmative and negative

obligations,9 and, in return, are

accorded certain privileges, including

exempt credit financing.10 For this

reason, it is critical that only those

members who are engaged in bona fide

market making activities qualify for

favorable margin treatment under the

Exchange’s rules. To the extent that

transactions that decrease a position in

a market maker account contribute to

the depth and liquidity in the market for

CHX-traded securities, the Commission

believes that it is appropriate for the

Exchange to conclude that such

transactions constitute bona fide market

making activity.

By including in the Exchange’s

exempt credit 50% minimum quarterly

share volume requirements a greater

number of transactions that contribute

to the maintenance of fair and orderly

markets, registered market makers are

facilitated in their ability to finance

transactions that provide market

continuity and stability. Enhancements

in the quality of the market CHX-traded

securities in turn foster investor

confidence and participation in the

market. Accordingly, the Commission

believes 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)

and 11(b).11

IV. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,12 that the

proposed rule change SR–CHX–98–05

be and hereby is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.13

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–14021 Filed 5–27–98; 8:45 am]

BILLING CODE 8010–01–M

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.

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 1⁄16th 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
29278 Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Notices

S&P 500TM 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 1⁄8th 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 1⁄8th 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 1⁄8th 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 1⁄8th 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 1⁄8th 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 1⁄16th of a point lower than

the ITS Best Offer (for a buy order) or

1⁄16th 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
Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Notices 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

500TM Index will determine which

program will be followed for execution.

If a stock is not included in the S&P

500TM 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 500TM

Index, or if a specialist in a non-S&P

500TM 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 3⁄16th of a point, and

(B) 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
29280 Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Notices

2See Securities Exchange Act Release No. 35753

(May 22, 1995), 60 FR 28007 (May 26, 1995) (File

No. SR–CHX–95–08).

3See 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).

4See Securities Exchange Act Release No. 38816

(July 3, 1997), 62 FR 37325 (July 11, 1997) (File No.

SR–CHX–97–18).

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 1⁄16th

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 1⁄8th

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 1⁄8th 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.

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

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.

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
Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Notices 29281

5For 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).

6As 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).

7Under 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).

8Under 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.

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 BBC6 (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 1⁄8th 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.

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 doubleup/double down concept has been

eliminated. The simplified algorithm

will now provide 11⁄16th of a point price

improvement from the ITS BBO if an

execution at the ITS BBO would be at

least 1⁄8th 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.

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 3⁄16th

of a point (rather than the 1⁄4 point

spread that is required under the

existing rule). In addition, the doubleup/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 1⁄18th 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 1⁄16th

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 1⁄8th 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.

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.
29282 Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Notices

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).

11The CHX presently has the ability to install the

new SuperMAX algorithm.

12See Securities Exchange Act Release No.

37619A (September 6, 1996), 61 FR 48290

(September 12, 1996).

13The proposal to permanently adopt the new

SuperMAX will be considered with the proposal to

approve the adoption of the new Enhanced

SuperMAX.

14 15 U.S.C. 78s(b)(2).

15 17 CFR 200.30–3(1)(12).

1On November 13, 1997, the Board filed the same

proposal as a Q&A under Section 19(b)(3)(A) of the

Act, which rendered the proposal effective upon

receipt of the filing by the Commission. See

Securities Exchange Act Rel. No. 39391 (December

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 1⁄16ths 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

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.

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.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.15

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–14113 Filed 5–27–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40014; File No. SR–MSRB–

98–1]

Self-Regulatory Organizations;

Municipal Securities Rulemaking

Board; Order Granting Approval of

Proposed Rule Change and Notice of

Filing and Order Granting Accelerated

Approval of Amendment No. 1 Relating

to Interpretation of Rule G–38 on

Consultants Concerning Bank

Affiliates and the Definition of Payment

May 20, 1998.

I. Introduction

On January 12, 1998,1 the Municipal

Securities Rulemaking Board (‘‘Board’’