12796 Federal Register / Vol. 60, No. 45 / Wednesday, March 8, 1995 / Notices

1 15 U.S.C. 78s(b)(1) (1988).

2 17 CFR 240.19b-4 (1991).

3See Securities Exchange Act Release No. 30189

(January 14, 1992), 57 FR 2621 (January 22, 1992)

(File No. SR–MSE–91–10) (‘‘1992 Approval

Order’’).

4See Securities Exchange Act Release No. 31975

(March 10, 1993), 58 FR 14230 (March 16, 1993)

(File No. SR–MSE–93–04) (‘‘March 1993 Approval

Order’’).

5See Securities Exchange Act Release No. 32457

(June 11, 1993), 58 FR 33681 (June 18, 1993) (File

No. SR–MSE–93–14) (‘‘June 1993 Approval Order’’).

6See Securities Exchange Act Release No. 33790

(March 21, 1994), 59 FR 14434 (March 28, 1994)

(File No. SR–CHX–93–30) (‘‘1994 Approval

Order’’).

7See 1992 Approval Order, supra, note 3.

8For example, assume the market in ABC stock

is 20–20 1⁄8; 50 × 50 with 1⁄8th being out of range.

A customer places an order with the Exchange

specialist to buy 100 shares of ABC at the market,

and a stop is effected. The order is stopped at 201⁄8,

and the Exchange specialist includes the order in

his or her quote by bidding the 100 shares at 20.

If the next sale on the primary market is for 100

shares at 20, adopting the Exchange’s existing

general policy to minimum variation markets would

require the specialist to execute the stopped market

order at 20. However, because the stopped market

order does not have time or price priority, its

execution would trigger the requirement for the

Exchange specialist to execute all pre-existing bids

(in this case, 5,000 shares) based on the Exchange’s

rules of priority and precedence. This is so even

though the pre-existing bids were not otherwise

entitled to be filled.

In the above example, Exchange Rule 37 (Article

XX) requires the Exchange specialist to fill orders

at the limit price only if such orders would have

been filled had they been transmitted to the primary

market. Therefore, the 100 share print at 20 in the

primary market would cause at most 100 of the

5,000 share limit order to be filled on the Exchange.

However, the Exchange’s general policy regarding

stopped orders, if applied to minimum variation

markets, would require the 100 share stopped

market order to be filled, and, as a result, all preexisting bids at the same price to be filled in

accordance with Exchange Rule 16 (Article XX).

9See 1992 Approval Order, supra, note 3.

10Exchange Rule 28 (Article XX) states.

An agreement by a member or member

organization to ‘‘stop’’ securities at a specified price

shall constitute a guarantee of the purchase or sale

by him or it of the securities at the price or its

equivalent in the amount specified. If an order is

executed at a less favorable price than that agreed

upon, the member or member organization which

agreed to stop the securities shall be liable for an

adjustment of the differences between the two

prices.

[Release No. 34–35431; File No. SR–CHX–

95–04]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval to Proposed

Rule Change by Chicago Stock

Exchange, Inc. Relating to an

Extension of a Pilot Program for

Stopped Orders in Minimum Variation

Markets

March 1, 1995.

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 February

8, 1995, the Chicago Stock Exchange,

Inc. (‘‘CHX’’ or ‘‘Exchange’’) filed with

the Securities and Exchange

Commission (‘‘Commission’’ or ‘‘SEC’’)

the proposed rule change as described

in Items I and II below, which Items

have been prepared by the selfregulatory organization. The CHX has

requested accelerated approval of the

proposal. 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 Exchange proposes to extend the

pilot program for stopped orders in

minimum variation markets for an

additional four (4) month period. This is

the fourth requested extension of the

pilot, originally approved on January 14,

1992.3 The first requested extension of

the pilot was approved on March 10,

1993.4 The second requested extension

of the pilot was approved on June 11,

1993.5 The third requested extension of

the pilot was approved on March 21,

1994.6 The pilot program is set to expire

on March 21, 1995. The Exchange has

submitted its current monitoring report

under separate cover. The report covers

the period December 20, 1994 through

January 20, 1995 and includes detailed

data for January 4, 1995.

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

self-regulatory organization 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

The purpose of the proposed rule

change is to extend the pilot program

implemented to establish a procedure

regarding the execution of ‘‘stopped’’

market orders in minimum variation

markets (usually an 1⁄8th spread market).

In 1992, the Exchange adopted

interpretation and policy .03 to Rule 37

of Article XX, on a pilot basis, to permit

stopped market orders in minimum

variation markets.7 Prior to the pilot

program, no Exchange rule required

specialists to grant stops in minimum

variation markets if an out-of-range

execution would result. While the

Exchange has a policy regarding the

execution of stopped market orders

generally, the Exchange believes it is

necessary to establish a separate policy

for executing stopped market orders

when there is a minimum variation

market.

The Exchange’s general policy

regarding the execution of stopped

orders is to execution them based on the

next primary market sale. If this policy

were used in a minimum variation

market, it would cause the anomalous

result of requiring the execution of all

pre-existing orders, even if those orders

are not otherwise entitled to be filled.8

The Exchange’s proposed policy

would prevent unintended results by

continuing a pilot program, established

in 1992, for stopped market orders in

minimum variation markets.9

Specifically, the pilot program would

require the execution of stopped market

orders in minimum variation markets

after a transaction takes place on the

primary market at the stopped price or

worse (higher for buy orders and lower

for sell orders), or after the applicable

Exchange share volume is exhausted. In

no event would a stopped order be

executed at a price inferior to the

stopped price.10 In the Exchange’s view,

the proposed policy would continue to

benefit customers because they might

receive a better price than the stop

price, yet it also protects Exchange

specialists by eliminating their exposure

to executing potentially large amounts

of pre-existing bids or offers when such

executions would otherwise not be

required under Exchange rules.

2. Statutory Basis

The Proposed rule change is

consistent with Section 6(b) (5) in that

it is designed to promote just and

equitable principles of trade.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange believes that no

burdens will be placed on competition

as a result of the proposed rule change.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants or Others

No comments were received.
Federal Register / Vol. 60, No. 45 / Wednesday, March 8, 1995 / Notices 12797

11 15 U.S.C. 78f (1988).

12 15 U.S.C. 78f (1988).

13For a description of CHX procedures for

stopping stock in minimum variation markets, and

of the Commission’s rationale for approving those

procedures on a pilot basis, see 1992 Approval

Order, supra, note 3. The discussion in the

aforementioned order is incorporated by reference

into this order.

14See supra, notes 3–6.

15The Commission notes that this pilot program

is intended to prevent orders from being executed

outside the primary market range for the day (i.e.,

from establishing a new high or new low).

Consistent with that policy, the CHX requires the

specialist to execute stopped stock based on the

next primary market sale. Specifically, if the next

sale is at a better price, the stopped stock may,

depending on the depth of the specialist’s limit

order book at that price, receive price improvement.

However, if the next primary market sale is at the

stop price (or worse), the order can receive the stop

price. If an order is executed at the stop price

because the next sale creates a new primary market

range, the pilot program may still have provided a

benefit to investors, by preventing what would have

been an out-of-range execution.

Conversely, an order may not benefit from the

CHX proposal if, despite having been stopped, it

ultimately receives an out-of-range execution. In a

minimum variation market, this can occur if, by the

close, (1) the primary market has not traded at the

stop price and (2) all pre-existing limit orders on

the CHX specialist’s book at the better price have

not been executed.

16When stock is stopped, book orders on the

opposite side of the market that are entitled to

immediate execution lose their priority. If the

stopped order then receives an improved price,

limit orders at the stop price are bypassed and, if

the market turns away from that limit, may never

be executed.

17See, e.g., SEC, Report of the Special Study of

the Securities Markets of the Securities and

Exchange Commission, H.R. Doc. No. 95, 88th

Cong., 1st Sess. Pt. 2 (1963). Commission, H.R. Doc.

No. 95, 88th Cong., 1st Sess. Pt. 2 (1963).

III. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning the foregoing.

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

Section, 450 Fifth Street, NW.,

Washington, DC 20549. 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–95–04

and should be submitted by March 29,

1995.

IV. Commission’s Findings and Order

Granting Accelerated Approval of

Proposed Rule Change

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

Section 6(b)(5) 11 and Section 11(b) 12 of

the Act. The Commission believes that

proposed interpretation and policy .03

to Rule 37 should further the objectives

of Section 6(b)(5) and Section 11(b)

through pilot program procedures

designed to allow stops, in minimum

variation markets, under limited

circumstances that offer primary market

price protection for customers whose

orders are granted stops, while still

adhering to traditional auction market

rules of priority and precedence.13

In its orders approving the pilot

procedures,14 the Commission asked the

CHX to study the effects of stopping

stock in a minimum variation market.

Specifically, the Commission requested

information on (1) the percentage of

orders which received an out-of-range

execution despite having been stopped;

(2) whether limit orders on either side

of the specialist’s book were bypassed

due to the execution of stopped orders

at a better price (and to this end, the

Commission requested that the CHX

conduct a one-day review of all book

orders in the five stocks receiving the

greatest number of stops); and (3)

specialist compliance with the pilot

program’s procedures.

The Exchange has submitted to the

Commission several monitoring reports

regarding its proposed interpretation of

Rule 37. The Commission believes that,

although these monitoring reports

provide certain useful information

concerning the operation of the pilot

program, the Commission must conduct

further analysis of the CHX data and, in

particular, of the rule’s impact on limit

orders on the specialist’s book before it

can consider permanent approval

thereof. To allow the Commission fairly

and comprehensively to evaluate the

CHX’s use of its pilot procedures,

without compromising the benefit that

investors might receive under Rule 37,

as amended, the Commission believes

that it is reasonable to extend the pilot

program until July 21, 1995.

First, the Exchange’s latest monitoring

report indicates that relatively few

orders received an out-of-range

execution despite having been stopped

and, thus, did not benefit from the CHX

proposal.15 The Commission believes

that the pilot procedures provide a

benefit to certain investors by offering

primary market price protection to

customers whose orders are granted

stops in minimum variation markets.

According to the CHX report, moreover,

virtually all stopped orders were for

2,000 shares or less. In this respect, the

proposed amendments should mainly

affect small public customer orders,

which the Commission envisioned

could most benefit from professional

handling by the specialist.

Second, the CHX does not appear to

believe that its proposed policy

significantly disadvantages customer

limit orders existing on the specialist’s

book.16 This conclusion is based on the

Exchange’s analysis of limit orders on

the opposite side of the market at the

time a stop was granted pursuant to the

pilot program. As part of its analysis

(which included a one-day review of the

five stocks receiving the greatest number

of stops), the CHX determined how

often book orders which might have

been entitled to an execution had the

order not been stopped, in fact, were

executed at their limit price by the close

of the day’s trading. In addition to

aggregated data, the Exchange provided

a detailed breakdown of the disposition

of each order.

The Commission historically has been

concerned that book orders may be

bypassed when stock is stopped,

especially in a minimum variation

market.17 Based on the CHX’s prior

experience, the Commission did not

have sufficient grounds to conclude that

this long-standing concern had been

alleviated. The Commission

acknowledges, however, that the CHX’s

latest monitoring reports provide new

information on this aspect of the pilot

program. As a result, the Commission

finds that additional time is necessary

for the Commission to review such

information and to ensure that Rule 37,

as amended, does not harm public

customers with limit orders on the

specialist’s book.

As for book orders on the same side

of the market as the stopped stock, the

Commission believes that the proposed

requirements make it unlikely that these

limit orders would be bypassed. Under

the Exchange’s pilot procedures, a

stopped order can receive price

improvement only if all preexisting

CHX share volume at that price has been

exhausted.

As for the pilot program’s effect on

limit orders on the same side of the

market as the stopped stock, the CHX

report suggests that a substantial

majority of limit orders at the bid (for
12798 Federal Register / Vol. 60, No. 45 / Wednesday, March 8, 1995 / Notices

18See supra, note 8 and accompanying text.

19Telephone conversation between David T.

Rusoff, Foley & Lardner, and Beth A. Stekler,

Attorney, Division of Market Regulation, SEC, on

February 28, 1995.

20No comments were received in connection with

the proposed rule change which implemented these

procedures. See 1992 Approval Order, supra, note

4.

21 15 U.S.C. 78s(b)(2) (1988).

22 17 CFR 200.30–3(a)(12) (1991).

1 15 U.S.C. 78s(b) (1988).

2Securities Exchange Act Release No. 34541

(August 17, 1994), 59 FR 43603.

3Letters from R.N. Dillingham to Commissioners,

Commission (September 12, 1994); Sarah A. Miller,

Senior Government Relations Counsel, Trust and

Securities, American Bankers Association, to

Jonathan G. Katz, Secretary, Commission

(September 14, 1994); P. Howard Edelstein,

President, Electronic Settlement Group, Thomson

Trading Services, Inc. (A Thomson Financial

Services Company), to Jonathan G. Katz, Secretary,

Commission (September 16, 1994); and Diane M.

Butler, Director—Operations & Fund Custody,

Investment Company Institute, to Jonathan G. Katz,

Secretary, Commission (September 22, 1994). In

addition, the MSRB received six comment letters

prior to filing the proposed rule change with the

Commission. See infra note 7.

4On October 6, 1993, the Commission adopted

Rule 15c6–1 under the Act which establishes T+3

as the standard settlement cycle for most brokerdealer transactions. Rule 15c6–1 does not apply to

transactions in municipal securities. While

municipal securities were specifically exempt from

the scope of the rule, the Commission stated its

expectation that the MSRB would take the lead in

moving municipal securities to a T+3 settlement

time frame. Securities Exchange Act Release No.

33023 (October 6, 1993), 58 FR 52891.

5Rule 15c6–1, as adopted, was to become

effective June 1, 1995. In order to provide for an

orderly and efficient transition from T+5 settlement

to T+3 settlement, the Commission has changed the

effective date of Rule 15c6–1 to June 7, 1995.

Securities Exchange Act Release No. 34952

(November 9, 1994), 59 FR 59137.

6 ‘‘When, as and if issued’’ transactions are

transactions in municipal securities which have not

yet been issued.

7Letters from W. Pat Conners, Conners & Co.,

Inc., to Judy Somerville, MSRB (March 25, 1994);

stopped buy orders) or offer (for stopped

sell orders) with time priority were

executed by the close. 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.18 In the

Commission’s opinion, the CHX data

suggests that stopped stock generally

has been executed in accordance with

traditional auction market principles.

Finally, the CHX has responded to the

Commission’s questions about

compliance with the pilot program

procedures; at this time, the Exchange

staff is not aware of any market

surveillance investigations or customer

complaints relating to the practice of

stopping stock in minimum variation

markets.19 In the event, however, that

the CHX identifies any instances of

specialist noncompliance with the pilot

procedures, the Commission would

expect the Exchange to take appropriate

action in response.

During the pilot extension, the

Commission requests that the Exchange

continue to monitor the effects of

stopping stock in a minimum variation

market and to provide additional

information where appropriate. In

addition, if the Exchange determines to

request permanent approval of the pilot

program or an extension thereof beyond

July 21, 1995, the CHX should submit to

the Commission a proposed rule change

by April 15, 1995.

The Commission finds good cause for

approving the proposed rule change

prior to the thirtieth day after the date

of publication of the notice of filing

thereof. This will permit the pilot

program to continue on an

uninterrupted basis. In addition, the

procedures the Exchange proposes to

continue using are the identical

procedures that were published in the

Federal Register for the full comment

period and were approved by the

Commission.20

It is therefore ordered, pursuant to

Section 19(b)(2) 21 that the proposed

rule change (SR–CHX–95–04) is hereby

approved on a pilot basis until July 21,

1995.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.22

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–5578 Filed 3–7–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–35427; File No. SR–MSRB–

94–10]

Self-Regulatory Organization; The

Municipal Securities Rulemaking

Board; Order Approving Proposed

Rule Change Establishing Three

Business Day Settlement Time Frame

February 28, 1995.

On August 9, 1994, the Municipal

Securities Rulemaking Board (‘‘MSRB’’)

submitted a proposed rule change to the

Securities and Exchange Commission

(‘‘Commission’’) pursuant to Section

19(b) of the Securities Exchange Act of

1934 (‘‘Act’’).1 Notice of the proposal

appeared in the Federal Register on

August 24, 1994.2 The Commission

received four comment letters.3 This

order approves the proposal.

I. Description of the Proposal

The purpose of the proposed rule

change is to establish three business

days after execution of a trade (‘‘T+3’’)

as the standard settlement time frame

for transactions in municipal securities.

The proposal conforms the standard

settlement time frame for municipal

transactions to that for most other equity

and debt securities transactions.4

Currently, regular-way settlement is

defined as five business days (‘‘T+5’’) in

MSRB rules G–12 (‘‘Uniform Practice’’)

and G–15 (‘‘Confirmation, Clearance

and Settlement Transactions with

Customers’’). The proposed rule change

will be effective on June 7, 1995, the

same day as the Commission’s Rule

15c6–1.5

The proposed rule change allows

alternate settlement time frames for

municipal securities transactions in the

secondary market by agreement of the

parties at the time of each individual

transaction. Thus, broker-dealers may

not use standing instructions or master

agreements to retain T+5 settlement as

a standard practice.

The proposed rule change does not

alter the current practice with respect to

‘‘when, as and if issued’’ transactions.6

Currently, ‘‘when, as and if issued’’

transactions are not settled in five

business days due to the various actions

necessary to accomplish settlement with

the issuer of municipal securities.

Therefore, rule G–12(b) will continue to

provide that ‘‘when, as and if issued’’

transactions will settle on a date agreed

to by both parties but not earlier than

the fifth day following the date the

confirmation indicating the final

settlement date is sent or the sixth day

following the date the confirmation

indicating the final settlement date is

sent for transactions between a manager

and a syndicate member.

The proposed rule change also will

amend rule G–15(d)(i) relating to

institutional customer delivery

instructions on delivery versus payment

or receipt versus payment (‘‘DVP/RVP’’)

settlements to reflect a T+3 rather than

T+5 settlement cycle. Pursuant to the

amendment, a broker-dealer must obtain

a representation from a customer with

DVP/RVP privilege that the customer

will deliver instructions to its agent

with respect to the receipt or delivery of

the securities involved in the

transaction promptly and ‘‘in a manner

to assure that settlement will occur on

settlement date.’’ The MSRB has deleted

references to specific agent instruction

time frames.

II. Written Comments

In addition to the six comment letters

the MSRB received prior to the filing of

its proposal,7 the Commission received