[Federal Register Volume 63, Number 136 (Thursday, July 16, 1998)]
[Notices]
[Pages 38442-38444]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18906]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40187; File No. SR-CHX-98-13]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Inc. Amending the Exchange's 
Clearing the Post Policy for Cabinet Securities

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 10, 1998, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the CHX. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1) (1994).
    \2\ 17 CFR 240.19b-4 (1997).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend interpretation and policy .02 of CHX 
Rule 10 of Article XX and amend CHX Rule 11 of Article XX relating to 
clearing the post and to make permanent the policy contained in Article 
XX, Rule 11 regarding the ability of oral bids and offers to clear the 
cabinet post by phone. The text of the proposed rule change is as 
follows: Additions are italicized; deletions are [bracketed].

ARTICLE XX

Rule 10. Manner of Bidding and Offering.
    No change in text.

* * * Interpretations and Policies

02.  Clearing the Post.
    Policy. All orders received by floor brokers or originated by 
market makers on the floor of the Exchange must effectively clear the 
post before the orders may be routed to another market, either via the 
ITS System or through the use of alternative means.
    Floor brokers who receive an order on the floor have a fiduciary 
responsibility to seek a best price execution for such order. This 
responsibility includes clearing of the Exchange's post prior to 
routing an order to another market so that other buying and selling 
interest at the post can be checked for a potential execution that may 
be as good as or better than the execution available in another market.
    Market makers are required to provide depth and liquidity to the 
Exchange market, among other things. Exchange Rules require that all 
market maker transactions constitute a course of dealings reasonably 
calculated to contribute to the maintenance of a fair and orderly 
market. In so doing, market makers must adhere to traditional agency/
auction market principles on the floor. Transactions by Exchange market 
makers on other exchanges which fail to clear the Exchange post do not 
constitute such a course of dealings.
    Notwithstanding the above, it is understood that on occasion a 
customer will insist on special handling for a particular order that 
would preclude it from clearing the post on the Exchange floor. For 
example, a customer might request that a specific order be given a 
primary market execution. These situations must be documented and 
reported to the Exchange. Customer directives for special handling of 
all orders in a particular stock or all stocks, however, will not be 
considered as exceptions to clearing the post policy.
    All executions resulting from bids and offers reflected on Instinet 
terminals resident on the Exchange floor constitute ``orders'' which 
are ``communicated'' to the Exchange floor. Therefore, all orders 
resulting from interest reflected on Instinet terminals on the Exchange 
floor must be handled as any other order communicated to the floor. All 
such orders must be presented to the post during normal trading hours. 
All trades between Instinet and Exchange floor members are Exchange 
trades and must be executed on the Exchange.
    Method of Clearing the Post. [Subject to Article XX, Rule 11 
relating to cabinet securities,] [t]The Exchange's clearing the post 
policy requires the floor broker or market maker to be physically 
present on the Exchange floor and to be present at the post. So long as 
the floor broker or market maker is physically present on the Exchange 
floor, a floor broker's or market maker's bids and

[[Page 38443]]

offers may be made by clearing the post by phone provided that such 
bids and offers are audibly announced at the post through a speaker 
system maintained by the Exchange. A market maker, after requesting the 
specialist's market quote, must bid or offer the price and size of his 
intended interest at the post. A floor broker must clear the post by 
requesting a market quote from the specialist. If the specialist or any 
other member who has the post indicates an interest to trade at the 
price that was bid or offered by the market maker or the price of the 
floor broker's order (even though that order has not yet been bid or 
offered), then the trade may be consummated with the specialist (or 
whomever has the post) in accordance with existing Exchange priority, 
parity and precedence rules. If the specialist (or any other member who 
has the post) indicates interest to trade at that price but the member 
communicating the intended interest, including Instinet interest, 
determines not to consummate the trade with the specialist or such 
member, then, to preserve the Exchange's existing priority, parity and 
precedence rules, the trade may not be done with any other Exchange 
floor member. (See Article XXX, Rule 2). If the trade is consummated 
with the specialist or other member who has the post, the specialist 
(or any customer represented by the specialist) is not required to pay 
any fees to the broker or market maker in connection with the execution 
of the order, unless such fee is expressly authorized by an Exchange 
Rule. If the specialist does not indicate an interest to trade, then 
the trade may be consummated with another Exchange floor member on the 
Exchange floor with a resultant Exchange print.
    Failure to clear the post may result in a ``trade-through'' or 
``trading ahead'' of other floor interest. In addition, failure to 
properly clear the post may result in a violation of the Exchange's 
Just and Equitable Trade Principles Rule (Article VIII, Rule 7) and a 
market maker rule that requires all market maker transactions to 
constitute a course of dealing reasonably calculated to contribute to 
the maintenance of a fair and orderly market (Article XXXIV, Rule 1). 
Failure to properly clear the post may also subject the violator to a 
minor rule violation under the Exchange's Minor Rule Violation Plan.
Rule 11. Cabinet Securities
    Stocks having no designated specialist unit of trading shall be 
assigned for dealings by use of cabinets and shall be dealt in at a 
location designated for that purpose.
    The Exchange may also designate bonds which are to be dealt in by 
use of cabinets.
    Bids and offers in securities dealt in by use of cabinets shall be 
written on cards, which shall be filed in the cabinets in the following 
sequence:
    1. According to price, and
    2. According to the time received at the cabinet.
    Orders in such securities shall be filled according to the bids and 
offers filed in the cabinets, in the sequence indicated above, except 
that oral bids and offers in such securities may be made if not in 
conflict with bids and offers in the cabinets. Oral bids and offers may 
be made by clearing the cabinet post by phone provided that such bids 
and offers are audibly announced at the cabinet post through a speaker 
system maintained by the Exchange.
    Every card placed in the cabinets shall bear a definite price and 
number of shares and no mark or identification shall be placed thereon 
to indicate it is other than a limited order at the 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 CHX included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined in the places specified in 
Item IV below. The CHX has prepared summaries, set forth in Sections 
(A), (B), and (C) below, of the most significant aspects of such 
statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to make permanent the 
policy contained in Article XX, Rule 11 regarding the ability of oral 
bids and offers to clear the cabinet post by phone.\3\ The proposed 
rule change will also amend Article XX, Rule 10 to expand this policy 
to bids and offers in all securities traded on the trading floor.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 39519 (January 6, 
1998), 63 FR 1985 (January 13, 1998) (Order approving proposed rule 
change SR-CHX-97-28 relating to a six month pilot program for 
Exchange's clearing the post policy for cabinet securities); and 
Securities Exchange Act Release No. 40144 (June 30, 1998), 63 FR 
37157 (July 9, 1998) (Order approving proposed rule change SR-CHX-
98-17 relating to a five month extension of the pilot program for 
the Exchange's clearing the post policy for cabinet securities).
---------------------------------------------------------------------------

    Under the proposed rule change, as long as the floor broker or 
market maker is physically present on the Exchange floor, a floor 
broker's or market maker's bids and offers in any security traded on 
the trading floor may be made by clearing the post by phone, provided 
they are audibly announced at the post through a speaker system 
maintained by the Exchange. The Exchange has not experienced any 
adverse effects from the implementation of this policy for cabinet 
issues, and believes that the differences obtained with the use of a 
speaker system in cabinet issues should be extended floor wide.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b)(5) of the 
Act \4\ in that it is designed to prevent fraudulent and manipulative 
acts and practices and to perfect the mechanism of a free and open 
market.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

(B) Self-Regulatory Organization's Statement on Burden of 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 such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions

[[Page 38444]]

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-98-13 and 
should be submitted by August 8, 1998.

    For the Commission, by the Division of Market Regulations, 
pursuant to delegated authority.\5\
---------------------------------------------------------------------------

    \5\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-18906 Filed 7-15-98; 8:45 am]
BILLING CODE 8010-01-M