38866 Federal Register / Vol. 63, No. 138 / Monday, July 20, 1998 / Notices

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

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

to Gail A. Marshall, Division of Market Regulation,

Commission, dated February 12, 1998.

3This approval includes a technical amendment

that the Commission received which deleted an

inappropriate reference in the proposed rule text.

Article XX, Rule 37(b)(10) should not have

referenced automatic executions under Article XX,

Rule 37(b)(7). See letter David T. Rusoff, Foley &

Lardner, to Gail A. Marshall, Division of Market

Regulation, Commission, dated July 13, 1998.

4See CHX Manual, Art. XX, Rule 28 regarding

member liability for stopped orders.

5The MAX System provides an automated

delivery and, in certain cases, execution facility for

orders that are eligible for execution under Article

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

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

6For purposes of this filing, a marketable limit

order is a limit order that is marketable when

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

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

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

BBO at the time the order is received in the MAX

System. If the ITS BBO subsequently moves away

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

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

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

order but before execution of the order, the order

will still be considered a marketable limit order for

purposes of pending auto-stop. Conversely, if a

limit order is not marketable when received by the

MAX System, the order will not be considered a

marketable limit order for purposes of pending

auto-stop, even if the ITS BBO subsequently

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

7The term ‘‘agency order’’ means an order for the

account of a customer, but does not include

professional orders as defined in CHX, Art. XXX,

Rule 2, interpretation and policy .04. That rule

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

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

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

8 Dual Trading System Issues are issues that are

traded on the CHX, either through listing on the

CHX or pursuant to unlisted trading privileges, and

are also listed on either the New York Stock

Exchange or the American Stock Exchange.

9 It is the responsibility of the specialist to be able

to demonstrate that the order would not have been

executed had it been routed to the other market.

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

order to the primary market.

10A MAX order fits under the BEST parameters

must be executed pursuant to BEST Rules via the

MAX System. (See Art. XX, Rule 37(a) for BEST

Rules). While the BEST Rules do not apply if the

order is outside the BEST parameters, MAX System

handling rules are still applicable. (See Art. XX,

Rule 37(b) for MAX System handling rules)

11 If an oversized market or limit order is received

by the specialist, he will either reject the order

immediately or display it immediately, in

accordance with CHX Article XX, Rule 7 and the

SEC’s recently adopted Order Execution Rules

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

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

is displayed, the specialist will check with the

order entry broker to determine the validity of the

oversized order. During the one minute period, the

specialist can cancel the order and return it to the

order entry firm, but until it is canceled the

displayed order is eligible for execution.

(10), permit consideration of the

scheduled matters at the closed meeting.

Commissioner Johnson, as duty

officer, voted to consider the items

listed for the closed meeting in a closed

session.

The subject matter of the closed

meeting scheduled for Thursday, July

23, 1998, at 10:00 a.m., will be:

Instituion and settlement of injunctive

actions.

Instititon and settlement of

administrative proceedings of an

enforcement nature.

At times, changes in Commission

priorities require alterations in the

scheduling of meeting items. For further

information and to ascertain what, if

any, matters have been added, deleted

or postponed, please contact:

The Office of the Secretary at (202)

942–7070.

Dated: July 16, 1998.

Jonathan G. Katz,

Secretary.

[FR Doc. 98–19434 Filed 7–16–98; 3:44 pm]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40196; File No. SR–CHX–

98–01]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Amendment No. 1 by The Chicago

Stock Exchange, Incorporated Relating

to the Stopping of Market and

Marketable Limit Orders

July 13, 1998.

I. Background

On January 16, 1998, the Chicago

Stock Exchange, Incorporated (‘‘CHX’’

or ‘‘Exchange’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’) a proposed rule change

relating to the stopping of market and

marketable limit orders pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’).1 On

February 12, 1998, the Exchange filed

amendment No. 1 with the

Commission.2 The proposed rule

change, as amended, was published for

comment in Securities Exchange Act

Release No. 39956 (May 5, 1998), 63 FR

26233 (May 12, 1998). No comments

were received on the proposal. For the

reasons discussed below, the

Commission is approving the proposed

rule change.3

II. Description of the Proposal

The Exchange proposes to amend

Article XX, Rule 37(b) relating to the

stopping of market orders and

marketable limit orders in the Midwest

Automated Execution System (‘‘MAX

System’’). The purpose of the proposed

rule change is to amend CHX rules

relating to ‘‘stopped’’ orders 4 in the

MAX System 5 (i) to permit specialists to

stop a marketable limit order 6 if the

order is not immediately executed, and

(ii) to automate the stopping of certain

market orders that are not automatically

executed.

Under the Exchange’s BEST Rule,

Exchange specialists are required to

guarantee executions of all agency 7

market and limit orders for Dual

Trading System issues 8 from 100 shares

up to and including 2099 shares.

Subject to the requirements of the short

sale rule, market orders in Dual Trading

System issues must be executed at a

price equal to or better than the

Intermarket Trading System (‘‘ITS’’) best

bid or offer (‘‘BBO’’), up to the size

associated with the ITS BBO. Limit

orders must be executed at their limit

price or better when: (1) the ITS BBO at

the limit price has been exhausted in

the primary market; (2) there has been

a price penetration of the limit in the

primary market (generally known as a

trade-through of a CHX limit order); or

(3) the issue is trading at the limit price

on the primary market unless it can be

demonstrated that the order would not

have been executed if it had been

transmitted to the primary market or the

broker and specialist agree to a specific

volume related to, or other criteria for,

requiring an execution.9

The Exchange’s MAX System

provides for the automatic execution of

orders that are eligible for execution

under the Exchange’s BEST Rule and

certain other orders.10 The MAX System

has two size parameters which must be

designated by the specialist on a stockby-stock basis. For Dual Trading System

issues, the specialist must set the autoexecution threshold at 1099 shares or

greater and the auto-acceptance

threshold at 2099 shares or greater. In

no event may the auto-acceptance

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

firm sends an order through the MAX

System that is greater than the

specialist’s auto-acceptance threshold, a

specialist may cancel the order within

one minute of it being entered into the

MAX System. If the order is not

canceled by the specialist, the order is

designated as an open order.11 If the

order-entry firm sends an order through

the MAX System that is less than the

auto-acceptance threshold but greater

than the auto-execution threshold, the

order is not available for automatic

execution but is designated in the open

order book. A specialist may manually

execute any portion of the order; the
Federal Register / Vol. 63, No. 138 / Monday, July 20, 1998 / Notices 38867

12See CHX Article XX Rule 37(b)(6) and (7).

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

than the range in which the security has traded on

the primary market during a particular trading day.

14See CHX Manual, Art. XX, Rule 37(b)(11).

15See CHX Manual, Art. XX, Rule 37(b)(2).

16See CHX Manual, Art. XX, rule 37(b)(12).

17See CHX Manual, Art. XX, Rule 37(b)(10) and

(11). While makret orders may also be stopped

under the Exchange’s Enhanced SuperMAX

program, these orders are not subject to this filing.

18While both agency and professional orders will

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

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

immediate or cancel orders, orders that are or will

be stopped under the Enhanced SuperMAX

program, and other orders that cannot be entered

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

short exempt orders and special settlement orders)

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

orders.

19As is the case for all features of the MAX

System, in unusual trading conditions, this feature

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

an issue by issue basis) with the approval of two

members of the Exchange’s Committee on Floor

Procedure or designated member of the Exchange

staff who would have authority to set execution

prices. See CHX Article XX, Rule 37(b)(8). 20 15 U.S.C. 78f(b)(5).

difference must remain as an open

order. If the order-entry firm sends an

order through the MAX System that is

less than or equal to the auto-execution

threshold, the order is executed

automatically, unless an exception

applies.12

The MAX Rules currently provide

several exceptions to automatic

execution, even for orders that are less

than or equal to the auto-exeuction

threshold. First, unless a professional

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

it is not automatically executed,

regardless of size. Second, all market

orders for Dual Trading System issues

received through the MAX System that

would result in an out of range 13

execution are deemed to be received

with a request to ‘‘stop.’’14 Stopped

orders for Dual Trading System issues

are not automatically executed in the

usual course (i.e., pursuant to Rule

37(b)(6)), but are placed in the open

order file.15 The order sending firm then

receives a ‘‘UR Stopped’’ message. The

specialist is then required to include the

order in its quote by bidding (if it is an

order to buy) or offering (if it is an order

to sell) the shares at one minimum

variation better than the current market,

in an effort to obtain price improvement

for the order. Third, the MAX System

will not automatically execute a market

order or marketable limit order if the

size associated with the ITS BBO, for

Dual Trading System issues, is less than

the size of the market or marketable

limit order.16

Currently, the MAX System has no

functionality to automatically ‘‘stop’’

marketable limit orders; only market

orders are stopped, and then only for

Dual Trading System issues if the order

would result in out of range execution

or the size of the order is greater than

the size associated with the ITS BBO.17

Consequently, if a marketable limit

order is not immediately executed (e.g.,

it is out of range, the order is greater

than the size associated with the ITS

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

open order book. No message is sent to

the order sending firm until the order is

executed. The same is true for market

orders that are not automatically

stopped and are not automatically

executed.

Because no message is sent to the

order sending firm, the firm is uncertain

as to the current status of its order. As

a result, as stated above, the puprose of

the proposed rule change is (i) to permit

specialist to stop a marketable limit

order, and (ii) to automate the stopping

of certain market orders. Once stopped,

the order sending firm will then receive

a stopped message, rather than being

unsure as to the current status of the

order, as is currently the case.

Specifically, the CHX is proposing to

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

provide that all MAX market orders that

are from 100 up to and including 599

shares (or such higher amount

determined by a specialist on a stock by

stock basis) that are not automatically

executed in the normal course pursuant

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

insufficient size associated with the ITS

BBO, because the order would result in

an out of range execution, because the

order is a professional order and the

specialist has not yet decided whether

to accept the order, or because of any

other reason permitted under CHX

rules) will be identified as a ‘‘pending

auto stop’’ order.18

These orders will retain their

‘‘pending auto-stop’’ status for 30

seconds. At the end of this 30 second

period, the MAX System will

automatically stop the order and send a

‘‘UR Stopped’’ message to the order

sending firm, unless, before the end of

the 30 second period, the order is

executed, canceled, manually stopped

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

of these events occur, the ‘‘pending

auto-stop’’ status will be removed from

the order and the order will not

automatically be stopped.19 If an order

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

for the order will apply. If the order is

stopped, the stop price will be the ITS

BBO at the time the order is received in

the MAX System. Furthermore, if the

order is stopped after the ‘‘pending

auto-stop’’ period, the entire order will

be stopped.

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

the entire order will result in better

guarantees for the order than are

required by existing CHX Rules. For

example, professional orders are

currently not guaranteed an execution

under the BEST Rule. Under this

change, eligible professional market

orders will not be guaranteed an

execution at the stopped price.

Additionally, pursuant to Article XX,

Rule 28, a stopped order constitutes a

guarantee that the order will be

executed at the stopped price or better.

However, under existing rules, if the

size of the order is greater than the size

of the ITS BBO in existence when the

order is received, there is merely no

automatic execution of the order, the

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

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

under Rule 28 only that portion of the

order that is less than or equal to the

size of the ITS BBO is stopped. The

portion of the order that exceeds the ITS

BBO is not stopped. As proposed, the

entire size of the order (up to 599

shares) would be automatically stopped

after the seeond delay unless an

exception applies.

The Exchange believes that the 30

second delay between the time the order

is entered and the time the order is

stopped is appropriate. The 30 seconds

will give the specialist an opportunity to

review the order to determine whether

a stop is appropriate under the

circumstances.

The ‘‘pending auto-stop’’ feature of

the MAX System will operate from 8:45

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

entered into the MAX System after 8:45

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

to be ‘‘pending auto-stop’’ orders.

In addition to adding the new

‘‘pending auto stop’’ order to the MAX

System the CHX is proposing changes to

the MAX System that would permit a

specialist to manually ‘‘stop’’ a

marketable limit order, regardless of

size.

III. Discussion

The Commission believes that the

proposed rule change is consistent with

the Act and the rules and regulations

thereunder applicable to the Exchange,

and, in particular with Section 6(b)(5),20

which requires that the rules of an

exchange be designed, among other

things, 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
38868 Federal Register / Vol. 63, No. 138 / Monday, July 20, 1998 / Notices

21The stopped price will be the price at the time

the order was received in the MAX System,

consistent with CHX Rules for stopped orders.

22 If an order is ‘‘put on hold,’’ the existing CHX

Rules on order handling apply.

23 15 U.S.C. 78c(f).

24 15 U.S.C. 78s(b)(2).

25 15 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1) (1994).

2 17 CFR 240.19b–4 (1997).

3Municipal Securities Information Library and

MSIL are registered trademarks of the Board. The

MSIL system, which was approved in Securities

Exchange Act Release No. 29298 (June 13, 1991), 56

FR 28194 (June 19, 1991, is a central facility

through which information about municipal

securities is collected, stored and disseminated.

4Rule G–36 requires underwriters to provide

copies of final official statements and advance

refunding documents within certain specified time

frames for most new issues issued since January 1,

1990.

5Securities Exchange Act Release No. 37361

(June 25, 1996), 61 FR 34463 (July 2, 1996).

6The backlog fee plus delivery costs for 1996 if

$7,000; 1995 is $9,000; 1994 is $7,000; 1993 is

$9,000; 1992 is $7,000; 1991 is $8,000; 1990 is

$6,000. See Securities Exchange Act Release No.

38694 (May 29, 1997), 62 FR 30919 (June 5, 1997)

(1996 fee); Securities Exchange Act Release No.

37361 (June 25, 1996), 61 FR 34463 (July 2, 1996)

(1995 fee); Securities Exchange Act Release No.

35848 (June 14, 1995), 60 FR 32187 (June 20, 1995)

(1994 Fee); Securities Exchange Act Release No.

34602 (Aug. 25, 1994), 59 FR 45319 (Sept. 1, 1994)

(1993 and 1991 fees); and Securities Exchange Act

Release No.32482 (June 16, 1993), 58 FR 34115

(June 23, 1993) (1992 and 1990 fees). The fees for

the backlog collections vary based on the number

of documents received and processed in any given

year.

general, to protect investors and the

public interest.

The Commission believes that the

proposal to add the functionality to the

MAX System to automatically stop

unexecuted market orders and

marketable limit orders will provide

investors additional benefits. First,

specialists will now have the ability to

automatically stop marketable limit

order which provides investors with

improved opportunities for price

improvement on these orders. Second,

investors trading in Dual Trading

System issues will be provided with

more certainty as to the status of their

orders because the auto-stop feature

results in a message being sent to the

order sending firm notifying that firm

that the order has been stopped.21

Third, investors may receive improved

executions on their orders because, once

auto-stopped, the entire order (up to 599

shares) in Dual Trading System issues

will now be guaranteed an execution at

the stopped price, regardless of whether

it is an eligible professional market

order or an order greater than the size

of the ITS BBO.

The Commission believes that the

proposed 30 second ‘‘pending autostop’’ period prior to the order being

automatically stopped was designed to

provide specialists with an opportunity

to determine the best course for the

order, consistent with best execution

principles, whether that be executing

the order, manually stopping the order,

canceling the order, or putting the order

on hold.22 The Commission, however,

expects the Exchange, as it gains

experience with the auto-stop feature, to

review whether the ‘‘pending auto-stop’’

period should be less than 30 seconds.

In addition, the Commission anticipates

that the Exchange will surveil to

determine that specialists are not

eluding the auto-stop feature, and

thereby the benefits to investors, by

routinely putting orders on hold or

canceling them.

IV. Conclusion

For the foregoing reasons, the

Commission finds that the proposed

rule change is consistent with the Act

and the rules and regulations

thereunder applicable to a national

securities exchange. In addition, in

approving this rule, the Commission

notes that it has also considered the

proposed rule’s impact on efficiency,

competition, and capital formation.23

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,24 that the

proposed rule change (CHX–98–01) be,

and hereby is, approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.25

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–19182 Filed 7–17–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40195; File No. SR–MSRB–

98–7]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Municipal Securities Rulemaking

Board Relating to Fee for Backlog

Document Collection of its Official

Statement/Advance Refunding

Document Subsystem of the Municipal

Securities Information Library

July 13, 1998.

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 16,

1998, the Municipal Securities

Rulemaking Board (‘‘Board’’ or

‘‘MSRB’’) filed with the Securities and

Exchange Commission (‘‘Commission’’)

a proposed rule change is described in

Items I, II, III below, which Items have

been prepared by the Board. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Board is filing herewith a

proposed rule change to change certain

fees relating to the operation of its

Official Statement/Advance Refunding

Document (‘‘OS/ARD’’) subsystem of the

Municipal Securities Information

Library (‘‘MSIL’’) system.3 The Board

is establishing a price of $8,000 (plus

delivery or postage charges) of each of

its annual ‘‘backlog’’ collections of

official statements and refunding

documents.

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

Board included statements concerning

the purpose of, and basis for, the

purposed rule change and discussed any

comments it received on the proposed

rule change. The texts of these

statements may be examined at the

places specified in Item IV below. The

U.S. has prepared summaries, set forth

in Section 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 Purposed Rule

Change

1. Purpose

The OS/ARD subsystem is a central

electronic facility through which

information collected and stored

pursuant to MSRB Rule G–36 is made

available electronically and in paper

form to market participants and

information vendors.4 The annual

subscription fee for daily electronic

images of current year documents from

the OS/ARD system currently is

$14,000.5 The fees for backlog document

collections are substantially less than

fees for an annual subscription because

an annual subscription requires the

Board to send electronic media to the

subscriber each business day, but a

backlog collection requires fewer

resources.6

As of January 1, 1998, the Board

terminated its contract with its imaging

contractor and began operating the

Board’s own imaging subsystem. Part of

this change was to begin storing OS/

ARD images on CD–ROM instead of