Document ID: SEC-2011-1681-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Stock Exchange, Inc.
Posted Date: 2011-11-01T04:00Z

[Federal Register Volume 76, Number 211 (Tuesday, November 1, 2011)]
[Notices]
[Pages 67509-67510]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-28228]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65633; File No. SR-CHX-2011-29]

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Approving a Proposed Rule Change To Change the Status of 
Exchange-Registered Institutional Broker Firms

October 26, 2011.

I. Introduction

    On September 14, 2011, the Chicago Stock Exchange, Inc. (``CHX'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(``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 change the status of Exchange-registered 
Institutional Broker firms (``Institutional Brokers''). The proposed 
rule change was published for comment in the Federal Register on 
September 26, 2011.\3\ The Commission received no comment letters on 
the proposal. This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 65354 (September 19, 
2011), 76 FR 59476 (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposal

    Institutional Brokers are an elective sub-category of Exchange 
Participants who are subject to the obligations of Article 17 of the 
CHX rules. Typically, Institutional Brokers provide manual order 
handling and execution services for other broker-dealers or 
institutional clients. Institutional Brokers are the successors to the 
floor brokers that operated within the Exchange's previous floor-based, 
auction trading model. That model was eliminated as part of the 
Exchange's transition to its New Trading Model, which features an 
electronic limit order matching system as its core trading facility.\4\ 
In approving the Exchange's New Trading Model, the Commission stated:

    \4\ The Exchange replaced its traditional auction marketplace 
with its New Trading Model beginning in 2006. See Securities 
Exchange Act Release No. 54550 (September 29, 2006), 71 FR 59563 
(October 10, 2006) (SR-CHX-2006-05).
---------------------------------------------------------------------------

    Institutional brokers would be deemed to be participants 
operating on the Exchange, although they would not effect 
transactions from a physical trading floor (since the Exchange will 
no longer have a physical trading floor) and could trade from any 
location. A customer order would be deemed to be on the Exchange 
when received by an institutional broker, but would not have 
priority in the Matching System until it is entered into the 
system.\5\
---------------------------------------------------------------------------

    \5\ Id. 71 FR at 59567.

Due to certain changes in the function of Institutional Brokers,\6\ CHX 
proposes to treat Institutional Brokers as no longer always operating 
on the Exchange. Pursuant to CHX's proposal, an order that is sent to 
an Institutional Broker shall not be deemed to be ``on the Exchange'' 
unless and until the Institutional Broker enters it into the Exchange's 
Matching System.\7\ Correspondingly, the Exchange proposes to delete 
certain references to Institutional Brokers and/or their activity as 
being ``on the Exchange'' in Article 11, Rule 3(e) and in Article 17, 
Rule 3(a) and in Interpretation and Policy .01 thereto.
---------------------------------------------------------------------------

    \6\ Until fairly recently, CHX permitted Institutional Brokers 
to execute trades outside the Exchange's core trading facility, the 
Matching System, and those trades were still considered to be on the 
Exchange. Utilizing a functionality known as the Validated Cross, 
Institutional Brokers executed cross transactions based upon the 
state of the national market and orders residing in the Matching 
System at the time the parties agreed to the execution, rather than 
as of the entry of all essential terms into the electronic systems 
used by Institutional Brokers to handle and execute such 
transactions. See, e.g., CHX Market Regulation Department 
Information Memorandum MR-07-9 (December 6, 2007). In December 2010, 
the Exchange eliminated the Validated Cross functionality and 
ability of Institutional Brokers to execute transactions on the CHX 
otherwise than through the Matching System. See Securities Exchange 
Act Release No. 63564 (December 16, 2010), 75 FR 80870 (December 23, 
2010) (SR-CHX-2010-25). Given this change, the Exchange states there 
is no longer any meaningful reason to treat Institutional Brokers as 
operating on the Exchange and the proposed Interpretation and Policy 
.04 reflects that determination. See Notice, 76 FR at 59477.
    \7\ See New Interpretation and Policy .04 to Rule 3 of Article 
17.
---------------------------------------------------------------------------

    The Exchange also proposes to delete Article 20, Rule 7 (Clearing 
the Matching System), which requires Institutional Brokers to attempt 
to execute trades on the Exchange before routing the order to another 
destination, except if the Institutional Broker is trading for its own 
account or its customer specifically requests otherwise. Currently, 
Institutional Brokers are not permitted to execute transactions 
directly in the over-the-counter (``OTC'') marketplace because, as 
discussed above, orders directed to them are deemed on the Exchange.\8\ 
In light of the proposed elimination of the on-Exchange designation of 
all Institutional Broker orders, CHX also proposes to modify Article 
17, Rule 1 to permit Institutional Brokers to effect transactions both 
on the Exchange and

[[Page 67510]]

in other market centers, which would include the OTC marketplace, 
subject to the rules of the appropriate self-regulatory organization 
(``SRO'').\9\
---------------------------------------------------------------------------

    \8\ See CHX Market Regulation Department Information Memorandum 
MR-11-09 (July 14, 2011), available on the Exchange's public Web 
site, http://www.chx.com.
    \9\ Currently, the SRO for the OTC marketplace is FINRA.
---------------------------------------------------------------------------

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.\10\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\11\ in that it is designed to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transaction in 
securities, to remove impediments and perfect the mechanisms of a free 
and open market, and, in general, to protect investors and the public 
interest.
---------------------------------------------------------------------------

    \10\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission notes that, due to the elimination of the Validated 
Cross functionality, an Institutional Broker can only execute an order 
on the Exchange by submitting an order into the Matching System, which 
is the means all other Exchange participants execute orders on the 
Exchange.\12\ The Commission believes that it is appropriate and 
consistent with the Act for Institutional Brokers to no longer be 
deemed to be a participant operating on the Exchange, and that a 
customer order received by an Institutional Broker should not be deemed 
to be on the Exchange unless and until such order is entered into the 
Matching System. Allowing an Institutional Broker to execute 
transactions other than on the Exchange and eliminating the requirement 
to clear the Matching System before sending customer orders to other 
trading centers, should permit an Institutional Broker to more 
effectively compete with other broker-dealers and serve the interests 
of their customers and investors.\13\
---------------------------------------------------------------------------

    \12\ See supra note 6.
    \13\ The Commission notes that it approved separately changes to 
CHX's rules governing the clearing of Institutional Brokers' 
transactions effected other than on CHX. See Securities Exchange Act 
Release No. 65615 (October 24, 2011) (SR-CHX-2010-17).
---------------------------------------------------------------------------

IV. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-CHX-2011-29) be, and it 
hereby is, approved.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-28228 Filed 10-31-11; 8:45 am]
BILLING CODE 8011-01-P