[Federal Register Volume 66, Number 95 (Wednesday, May 16, 2001)]
[Notices]
[Pages 27188-27190]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-12280]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44289; File No. SR-CHX-2001-09]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Inc., To Allow Floor Brokers To 
Clear a Specialist's Post By Telephone

May 10, 2001.
    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 April 23, 2001, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities Exchange Act Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 U.S.C. 240.19b-4.
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1. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend CHX Article XX, Rule 10 to permit 
floor brokers to clear a specialist's post telephonically. The text of 
the proposed rule change is below. Proposed additions are in italics. 
Proposed deletions are in brackets.

ARTICLE XX, RULE 10

Manner of Bidding and Offering

    Rule 10. Bids and offers to be effective must be audibly made at 
the post and shall remain in full force until the person making the 
bid or offer shall audibly announce that he is out of the market or 
until he leaves the post.
    * * * Interpretations and Policies: .01 Although there may be 
certain amount of negotiation by voice away from the post, every 
trade must be consummated at the post. .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 equal 
to [that may be as good as] or better than the execution available 
in another market. It is not inconsistent with a floor broker's 
fiduciary responsibility to effectively clear the post 
telephonically, provided that: (i) through the specialist, the floor 
broker probes the market for other buying and selling interest at 
the post, and (ii) after probing the market, if equal or better 
buying or selling interest is available at the post, the floor 
broker, while physically present at the post, consummates the trade 
at the post.

[[Page 27189]]

    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 markers 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 of 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 
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 the 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 the cabinet securities, the Exchange's general clearing the 
post policy requires [the] floor brokers and [or] market makers to 
be physically present at the post, but permits floor brokers, as a 
means of clearing the post, to telephonically probe a market through 
the specialist in order to more efficiently fulfill their fiduciary 
responsibility to seek a best price execution for their customer 
orders. 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 be 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 through 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, party 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 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 members [the violator] to a fine [minor 
rule violation] under the Exchange's Minor Rule Violation Plan.
* * * * *

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 IV below. The Exchange 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 Exchange proposes to amend CHX Article XX, Rule 10 to allow 
floor brokers to clear a specialist's post by phone. Under the 
Exchange's current rules, physical presence at a specialist's post is 
the only satisfactory method to clear the post before executing an 
order on the floor with another member or transmitting an order to 
another market center for execution via the Intermarket Trading System 
or through other means. The Exchange believes that permitting floor 
brokers, while on the CHX floor, to telephonically clear a specialist's 
post--for the purpose of determining the presence of other buying and 
selling interest on the CHX--would expand the manner of probing the CHX 
market in a faster, more efficient way while continuing to satisfy the 
rule's purpose. This change also will permit floor brokers to more 
efficiently fulfill their fiduciary obligations to seek the best 
available price in the national market for their customers' orders.
    The proposed rule does not place any absolute responsibility on 
specialists to permit floor brokers to clear a post by phone, but 
allows specialists to require floor brokers to come to the post if 
there is an active crowd or if the specialist is too busy to probe the 
market. Under the proposed rule, all trades must nevertheless continue 
to be consummated at the post.
2. Statutory Basis
    The Exchange believes that the proposed rule is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities exchange, and with the 
requirements of section 6(b).\3\ In particular, the Exchange believes 
the proposed rule is consistent with section 6(b)(5) of the Act \4\ in 
that it is 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.
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    \3\ 15 U.S.C. 78f(b).
    \4\ 15 U.S.C. 78f(b)(5).
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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.

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 CHX 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

[[Page 27190]]

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 20549-0609. 
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 in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
CHX. All submissions should refer to File No. SR-CHX-2001-09 and should 
be submitted by June 6, 2001.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-12280 Filed 5-15-01; 8:45 am]
BILLING CODE 8010-01-M