Federal Register / Vol. 63, No. 141 /Thursday, July 23, 1998 / Notices 39611

3The term ‘‘underlying equivalent value’’ is

defined in CBOE Rule 24A.1(r) for FLEX Index

options, but it is not a defined term for FLEX Equity

options.

4Example amended per conversation between

Gail Marshall-Smith, Division of Market Regulation,

SEC, and Tim Thompson, CBOE, dated June 15,

1998. 5 15 U.S.C. 78f(b)(5).

6 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

Purpose

The Exchange is proposing to change

the minimum value size for opening

transactions (other than FLEX Quotes

responsive to a FLEX Request for

Quotes) in any FLEX Equity Option

series in which there is no open interest

at the time the Request for Quotes is

submitted. Currently, CBOE Rule 24A.4

states that the minimum value size for

these opening transactions shall be 250

contracts. The Exchange is proposing to

change this rule such that the minimum

value size for these transactions shall be

the lesser of 250 contracts or the number

of contracts overlying $1 million of the

underlying securities.

The Exchange is proposing this

change because it believes the current

rule is unduly restrictive. The rule was

originally put in place in to limit

participation in FLEX Equity options to

sophisticated, high net worth

individuals. However, the Exchange

believes that limiting participation in

FLEX Equity Options based solely on

the number of contracts purchased may

diminish liquidity and trading interest

in FLEX Equity Options for higher

priced equities. The Exchange believes

the value of the securities underlying

the FLEX Equity Options is an equally

valid restraint as the number of

contracts and if set at the right limit can

also prevent the participation of

investors who do not have adequate

resources. In fact, the limitation on the

minimum value size for opening

transactions in FLEX Index Options is

tied to the same type of standard, the

underlying equivalent value.3 The

Exchange believes the number of

contracts overlying $1 million in

underlying securities is adequate to

provide the requisite amount of investor

protection. An opening transaction in a

FLEX Equity series on a stock priced at

$40.01 or more would reach this $1

million limit before it would reach the

contract size limit, i.e., 250 contracts

times the multiplier (100) times the

stock price ($40.01) totals $1,000,250

million in underlying value.4 It should

be noted that, currently, an investor can

purchase 250 contracts in a FLEX Equity

series on low priced stocks, meeting the

minimum requirement without

investing a minimum of $1 million. For

example, a purchase of FLEX Equity

Options overlying a $10 stock is

permitted although the underlying value

for the Options would be $250,000, i.e.,

250 contracts times the multiplier (100)

times the stock price ($10).

Statutory Basis

The Exchange believes the proposed

rule change is consistent with and

furthers the objectives of Section 6(b)(5)

of the Act 5 by facilitating transactions

in securities, removing impediments to

and perfecting the mechanism of a free

and open market in securities and

otherwise serving to protect investors

and the public interest. The Exchange

believes that the proposal maintains the

current investor protection principles

while providing more investors an

opportunity to trade FLEX Equity

Options.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The CBOE does not believe that the

proposed rule change will impose any

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 solicited

or received with respect to the proposed

rule change.

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

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 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 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 in

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principle office of the CBOE. All

submissions should refer to the file

number SR–CBOE–98–21 and should be

submitted by August 13, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to the delegated

authority.6

Jonathan G. Katz,

Secretary.

[FR Doc. 98–19649 Filed 7–22–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40215; File No. SR–CHX–

96–21]

Self-Regulatory Organizations;

Chicago Stock Exchange,

Incorporated; Order Granting Approval

to Proposed Rule Change and

Amendment No. 1 Thereto and Notice

of Filing and Order Granting

Accelerated Approval to Amendment

No. 2 to the Proposed Rule Change

Relating to ‘‘Stopped’’ Orders

July 15, 1998.

I. Introduction

On July 22, 1996, the Chicago Stock

Exchange, Incorporated (‘‘CHX’’ or

‘‘Exchange’’) submitted to the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’), pursuant to Section

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

of 1934 (‘‘Act’’) 1 and Rule 19b–4

thereunder,2 a proposed rule change to

adopt a rule relating to the entry and

execution of stop orders and to clarify

its rules relating to stopped orders. On

August 27, 1996, the CHX submitted to

the Commission Amendment No. 1 to
39612 Federal Register / Vol. 63, No. 141 /Thursday, July 23, 1998 / Notices

3See Letter from David T. Rusoff, Attorney, Foley

& Lardner, to Jon E. Kroeper, Attorney, SEC, dated

August 27, 1996 (‘‘Amendment No. 1’’).

4See Letter from David T. Rusoff, Attorney, Foley

& Lardner, to Michael Walinskas, Senior Special

Counsel, SEC, dated February 18, 1998

(‘‘Amendment No. 2’’). Amendment No. 2 narrows

the scope of the proposal by withdrawing the

portion of the proposal that would have defined a

‘‘stop’’ order.

5See Securities Exchange Act Release No. 37644

(September 5, 1996), 61 FR 48184.

6A stop order is an order designated as such by

the customer that requires the specialist to buy

(sell) a security once a specified price level has

been reached.

7See CHX Article XX, Rule 37. The Exchange’s

Guaranteed Execution System (BEST System)

specifies certain conditions under which CHX

specialists are required to accept and guarantee

executions of market and limit orders from 100 up

to and including 2099 shares in Dual Trading

System issues. Dual Trading System issues are

securities that are assigned to CHX specialists and

listed on either the New York Stock Exchange or the

American Stock Exchange.

8 15 U.S.C. 78f(b).

9 15 U.S.C. 78k(b).

10See supra note 7.

11For example, assume the market in ABC stock

is 20–201⁄4; 5000 shares bid and offered and that the

execution of an incoming buy market order for 500

shares at 201⁄4 would be higher than the range in

which the stock traded on the primary market

during that trading day. A CHX specialist would

stop such at 201⁄4 and change his or her quote to

201⁄16–201⁄4 500 bid and 5000 offered to reflect the

stopped order. If the next sale on the primary

market is for 500 shares at 201⁄8, the Exchange’s

existing general policy regarding stopping stock

would require the specialist to execute the stopped

order at 201⁄8. Alternatively, if the next primary

market sale is at 201⁄4, the stopped order will be

executed at 201⁄4. In minimum variation markets,

the CHX rules permit a specialist to delay execution

of stopped stock in minimum variation markets

until a volume equal to the pre-existing volume

ahead of the stopped order prints in the primary

market. Specifically, the specialist is required to

execute stopped orders in such markets after (1) a

transaction takes place on the primary market at the

bid (offer) or lower (higher) for a stopped sell (buy)

order or (2) the displayed CHX share volume at the

offer (bid) has been exhausted. See Interpretation

and Policy .03 to CHX Rules, Art. XX, Rule 37;

Securities Exchange Act Release No. 36401 (October

20, 1995), 60 FR 54893 (October 26, 1995) (File No.

SR–CHX–95–10) (order permanently approving

CHX pilot program for stopping stock in minimum

variation markets) (‘‘Pilot Program Permanent

Approval Order’’).

12 Id.

13E.g., although Art. XX, Rule 28 pertains to

stopped orders, the paragraph heading to this rule

currently reads ‘‘Liability for ‘Stop’ Orders.’’

14For example, assume the primary market quote

in ABC stock is the National Best Bid/Offer

(‘‘NBBO’’) at 20–201⁄4, 1000 shares bid and offered,

the CHX quote is 197⁄8–201⁄4, 200 shares bid and

offered, and the high sale for the day in the primary

market is 201⁄8. A CHX specialist would stop an

order to buy 1500 shares at 201⁄4 and change his or

her bid to 201⁄6 for 1500 shares to reflect the

stopped order. If the next sale on the primary

market is for 500 shares at 201⁄4, current CHX policy

would require the specialist to execute all 1500

shares of the stopped order at 201⁄4.

15For example, assume the primary market quote

in ABC stock is the NBBO at 20–201⁄4, 1000 shares

bid and offered, the CHX quote is 197⁄8–201⁄4, 200

shares bid and offered, and the high sale for the day

in the primary market is 201⁄8. A CHX specialist

would stop a market order to buy 1500 shares at

201⁄4 and change his or her bid to 201⁄16 for 1500

shares to reflect the stopped order. If the next sale

on the primary market is for 1000 shares at 201⁄4

(regardless of whether the specialist is the buyer),

the specialist would be obligated to execute 1000

shares of the stopped order at 201⁄4. If the primary

market quote then changes to 201⁄8–203⁄8, 1000

shares bid and offered, and a transaction occurs on

the primary market at 203⁄8 for 500 shares, then the

remaining 500 shares of the order will be executed

at 203⁄8.

the proposed rule change,3 on February

19, 1998, the CHX submitted to the

Commission No. 2 to the proposed rule

change.4

On September 12, 1996, the proposed

rule change, and Amendment No. 1

thereto, were published for comment in

the Federal Register.5 No comments

were received on the proposal. This

order approved the proposal, as

amended.

II. Description of the Proposal

The practice of stopping stock refers

to a guarantee by a specialist that an

order received by the specialist will be

executed at no worse a price than the

price agreed upon when the order was

received, with the understanding that

the order may receive a better price.

CHX Art. XX, Rule 28 sets forth the

obligations of a CHX specialist with

regard to orders that he or she has

stopped. The Exchange is proposing to

amend this rule to clarify that it pertains

to orders that are stopped, not stop

orders.6 Moreover, the Exchange is

proposing to amend CHX Art. XX, Rules

28 and 37(a)(6) to place a limitation on

the guarantee a specialist may provide

to an order that is stopped. Specifically,

the proposal provides such a guarantee

shall in no event be greater than the

greater of the size disseminated on

either the primary market or the

Exchange at the time the order was

stopped. The Exchange maintains that

this is consistent with the execution

guarantee on orders that are subject to

the BEST System that are not stopped,

which are guaranteed an execution

based on the lesser of the size displayed

in the primary market or 2099 shares.7

III. Discussion

The Commission finds that the

proposed rule change is consistent with

the requirements of the Act and the

rules and regulations thereunder

applicable to a national securities

exchange, and, in particular, with the

requirements of Section 6(b).8 In this

regard, the Commission believes the

proposal is consistent with the Section

6(b)(5) requirements that the rules of an

exchange be designed to promote just

and equitable principles of trade, to

prevent fraudulent and manipulative

acts, and, in general, to protect investors

and the public. Moreover, the

Commission believes that the proposal

is consistent with Section 11(b) of the

Act 9 in that the amendments to the

stopping stock procedures do not

provide discretion to a specialist in the

handling of an order.

The Exchange’s stopping stock

procedures, located in CHX Art. XX,

Rules 28 and 37(a), are intended

primarily to allow a specialist to prevent

a customer order in a Dual Trading

System issue subject to the BEST

System 10 from being executed at the

current primary market bid or offer if

such an execution would be outside of

the primary market range for the day

(i.e., establishing a new high or low

price in the security for the day).11

Under this stopping stock policy, the

specialist is required to execute stopped

stock based on the next primary market

sale.12

The Exchange has proposed to revise

the text of CHX Art. XX, Rule 28 to

clarify that this rule relates to stopped

stock and not stop orders. The

Commission believes that such a

revision is appropriate in that it will

rectify any ambiguity that currently

exists with regard to the subject matter

covered by this rule.13

More significantly, the Exchange is

proposing to amend CHX Art. XX, Rules

28 and 37(a) to limit a specialist’s

guarantee of an order that is stopped at

a particular price to the greater of the

size displayed in the primary market for

the security or by the Exchange when

the stopped order is entered. Currently,

the Exchange’s rules do not impose a

size limitation on the guarantee

provided by the specialist to orders that

are stopped. Therefore, a specialist must

execute the full size of a stopped order

based on the next primary transaction,

even if such transaction is for a lesser

number of shares than the stopped

order.14

In contrast, the CHX’s execution

guarantee on an order subject to the

BEST System that is not stopped is

limited to the lesser of the size

displayed in the primary market or 2099

shares. Accordingly, the Exchange

maintains that by establishing a size

limitation on the guarantee provided to

a stopped order, such guarantees will be

more consistent with the execution

guarantee provided to orders subject to

the BEST System that are not stopped.

Under the proposal, the portion of a

stopped order that is not executed as a

result of the next primary market

transaction will be executed in

accordance with the prices of

subsequent transactions on the primary

market.15
Federal Register / Vol. 63, No. 141 /Thursday, July 23, 1998 / Notices 39613

16See supra note 15.

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

18See H. Rep. No. 1383, 73d Cong. 2d Sess. 22,

S. Rep. 792, 73d Cong. 2d Sess. 18 (1934).

19See SEC, Report of the Special Study of

Securities Markets of the Securities and Exchange

Commission, H.R. Doc. No. 95, 88th Cong., 1st

Sess., Pt. 2 (1963).

20See Pilot Program Permanent Approval Order,

supra note 11. A limit order is an order to buy or

sell a stated amount of a security at a specified

price, or better if obtainable.

21However, if the guaranteed portion is executed

at a stop price that is the new high (low) for the

day, and the primary market quote subsequently

moves to the next higher (lower) trading increment,

pursuant to CHX rules the unexpected portion will

itself be stopped at that increment. In such

instances this portion would itself appropriately be

deemed equivalent to a limit order.

22Moreover, the Commission’s recently-released

study on ‘‘preferencing’’ on national securities

exchanges stated that the practice of stopping stock

should be reconsidered in the context of minimum

variation markets. See SEC, Report on the Practice

of Preferencing Pursuant to Section 510(c) of the

National Securities Markets Improvement Act of

1996 (‘‘Preferencing Study’’) (1997). The

Commission notes that nothing in this approval

order should be interpreted as affecting the

conclusions reached by the Commission in the

Preferencing Study.

23Telephone conversation between David T.

Rusoff, Attorney, Foley & Lardner and David

Sieradzki, Attorney, Commission on July 15, 1998.

24 15 U.S.C. 78f(b)(5) and 15 U.S.C. 78s(b).

25 15 U.S.C. 78s(b)(2).

26 17 CFR 200.30–3(a)(12).

The Commission recognizes the

unintended consequences that can arise

from the interplay between a regional

exchange’s price protection rules and its

procedures for stopping stock. The

Commission believes that the proposal

is an acceptable means for the Exchange

to accomplish the legitimate end of

treating out-of-range and in-range orders

in a more equivalent manner. The

Commission also believes that the

proposed rule change is appropriate in

the context of current regional exchange

market making practices. In this regard,

the proposal will permit the Exchange

to continue to reduce the likelihood of

an out-of-range execution for orders

entered on the CHX without obligating

the specialist to execute more shares

than may be available to the specialist

on the primary market to offset its

risk.16 Moreover, the Commission finds

it significant that under the proposal

CHX specialists will continue to offer

the opportunity for price improvement

to orders that are stopped to avoid an

out-of-range execution, regardless of

their size. In addition, the Commission

believes that the Exchange’s proposal is

appropriate in that providing generally

equivalent guarantee size limitations to

stopped and non-stopped orders will

allow for a more uniform treatment of

such orders by CHX specialists and

systems, thereby having the potential to

facilitate the ability of CHX specialists

to carry out their market making

functions.

Further, The Commission believes

that this provision is consistent with the

prohibition in Section 11(b) of the Act 17

against providing discretion to a

specialist in the handling of an order.

Section 11(b) was designed, in part, to

address potential conflicts of interest

that may arise as a result of the

specialist’s dual role as agent and

principal in executing stock

transactions. In particular, Congress

intended to prevent specialists from

unduly influencing market trends

through their knowledge of market

interest from the specialist’s book and

their handling of discretionary agency

orders.18 The Commission has stated

that, pursuant to Section 11(b), all

orders other than market or limit orders

are discretionary and therefore cannot

be accepted by specialists.19

In this regard, the Commission has

stated previously that it is appropriate

to treat a stopped order as equivalent to

a limit order.20 In reaching this

conclusion, the Commission did not

expressly consider the status of a

stopped order under exchange rules that

limit the guarantee of a stopped order by

its size. Under such rules, a stopped

order of a size exceeding the guarantee

shares features of both a limit and

market order. As with the typical

stopped order, the guaranteed portion is

executable at the guaranteed price or

better, and is therefore akin to a limit

order. The portion of the order that

exceeds the size guarantee is subject to

execution pursuant to the same

requirements applied to market orders

entered with CHX specialists.21 The

Commission, therefore, believes that the

requirements imposed on the specialist

with regard to such orders provide

sufficiently stringent guidelines to

ensure that the specialist will

implement the proposed rule change in

a manner consistent with his market

making duties and Section 11(b).

In conclusion, however, the

Commission notes that the Exchange’s

adoption of a guarantee size limitation

for stopped orders does not, in any way,

modify a CHX specialist’s best

execution obligation to any stopped

order that exceeds the size guarantee

limitation.22

The Commission finds good cause for

approving Amendment No. 2 to the

proposed rule change prior to the

thirtieth day after the date of

publication of notice of filing of this

amendment in the Federal Register.

Amendment No. 2 narrows the scope of

the proposal by withdrawing the portion

of the proposal that would have defined

a ‘‘stop’’ order. The Exchange represents

that it is reconsidering how to better

codify the Exchange’s rules relating to

‘‘stop’’ orders.23 Granting accelerated

approval to Amendment No. 2 will

allow the Exchange to codify its

procedures with respect to ‘‘stopped’’

orders immediately. The Commission

notes that the original proposal was

published for the full 21-day comment

period and no comments were received

by the Commission. Accordingly, the

Commission believes there is good

cause, consistent with Sections 6(b)(5)

and 19(b) 24 of the Act, to approve

Amendment No. 2 to the Exchange’s

proposal on an accelerated basis.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment No.

2, including whether Amendment No. 2

to the proposal is consistent with the

Act. Persons making written

submissions should file six copies

thereof with the Secretary, Securities

and Exchange Commission, 450 Fifth

Street, NW, Washington, DC 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–96–21 and should be

submitted by August 13, 1998.

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,25 that the

proposed rule change (SR–CHX–96–21),

as amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.26

Jonathan G. Katz,

Secretary.

[FR Doc. 98–19566 Filed 7–22–98; 8:45 am]

BILLING CODE 8010–01–M