Document ID: SEC-2005-0422-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Chicago Stock Exchange, Inc.
Posted Date: 2005-12-22T05:00Z

[Federal Register: December 22, 2005 (Volume 70, Number 245)]
[Notices]               
[Page 76088-76090]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22de05-103]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52953; File No. SR-CHX-2005-36]

 
Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change by the Chicago Stock Exchange, Inc. and Amendment No. 1 
Thereto Regarding Trading in Sub-Penny Increments

 December 14, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on November 1, 2005, the Chicago Stock Exchange, Inc. (the ``CHX'' 
or the ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the CHX. On December 
7, 2005, the Exchange filed Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1)
    \2\ 17 CFR 240.19b-4.
    \3\ See Form 19b-4 dated December 7, 2005. (``Amendment No. 
1''). In Amendment No. 1, the Exchange: (1) Deleted any references 
to customer orders to make clear that a specialist must not ``step 
ahead'' of any order in the book (not just customer orders) by less 
than $0.01; (2) deleted a proposed sentence relating to a 
specialist's trading in other markets; (3) revised the rule text to 
confirm the smallest increment ($0.0001) in which an order may be 
executed on the Exchange; and (4) made clear that this proposal 
relates only to the Exchange's current trading model.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Through this filing, the Exchange proposes to amend its rules to 
permit Exchange participants to execute orders in sub-penny increments. 
The text of this proposed rule change is available on the Exchange's 
Web site at http://www.chx.com/rules/proposed_rules.htm, at the 

Exchange's principal office, and in the Commission's Public Reference 
Room.

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 CHX included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received regarding the proposal. The text of 
these statements may be examined at the places specified in Item IV 
below. The CHX 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
    Under the Exchange's existing trading rules, the Exchange's 
participants may not bid or offer in increments below $0.01.\4\ Through 
this filing, the Exchange seeks to permit its participants to execute 
trades in sub-penny increments and to establish rules that regulate the 
instances when a specialist may trade in sub-penny increments against 
incoming orders

[[Page 76089]]

when there are orders in the specialist's book.\5\
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    \4\ The Exchange does not currently have a rule that sets a 
minimum increment at which trades can occur. Its rule relating to 
minimum variations specifically refers to variations at which bids 
or offers may be made on the Exchange. See Article XX, Rule 22.
    \5\ The Exchange intends to file a separate proposal to permit 
its participants and customers, beginning with the compliance date 
of Rule 612, to bid or offer in sub-penny increments in Nasdaq/NM 
securities, when those bids or offers are priced less than $1.00 per 
share.
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    As an initial matter, the proposed rule change would provide that 
Exchange participants may execute transactions in sub-penny 
increments.\6\ As noted above, there is not currently an Exchange rule 
that prohibits this practice, but the Exchange believes it is 
appropriate to establish that trading in sub-penny increments is 
specifically permitted. The Exchange believes that it is appropriate to 
allow its participants to execute transactions in sub-penny increments 
because other markets permit trading in these increments and the 
Exchange and its participants would be at a competitive disadvantage if 
this trading were not permitted.\7\
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    \6\ See proposed Article XX, Rule 22(b).
    \7\ In addition, although Rule 612 of Regulation NMS 
specifically prohibits the display, ranking, or acceptance of a bid, 
offer, or order in sub-penny increments where the bid, offer, or 
order is priced at or above $1.00, it does not prohibit trading in 
sub-penny increments. See 17 CFR 242.612(a). Indeed, the Commission, 
in the release of the final rules associated with Regulation NMS, 
noted that ``Rule 612 will not prohibit a sub-penny execution 
resulting from * * * price improvement * * * so long as the 
execution did not result from an impermissible sub-penny order or 
quotation.'' Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37556 (June 29, 2005).
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    Additionally, the proposed rule change would provide that an 
Exchange specialist (or a market maker holding a customer order) may 
not execute an incoming order in a sub-penny increment that is less 
than $0.01 better than a limit order in the specialist's (or market 
maker's) book. This prohibition on ``stepping ahead'' of a resting 
limit order for less than a penny would be expanded from its current 
scope, which applies only to the trading of Nasdaq/NM securities, to 
apply to the trading of all securities on the Exchange.\8\ The Exchange 
believes that this rule, which provides protection to orders in a 
specialist's book, should be extended to orders in listed securities 
before an Exchange specialist is permitted to.
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    \8\ The Exchange's rule relating to sub-penny trading in Nasdaq/
NM securities was first approved in 2001 and has been extended many 
times. See Securities Exchange Act Release Nos. 44164 (April 6, 
2001), 66 FR 19263 (April 13, 2001); 44535 (July 10, 2001), 66 FR 
37251 (July 17, 2001) (extending pilot through November 5, 2001); 
45062 (November 15, 2001), 66 FR 58768 (November 23, 2001) 
(extending pilot through January 14, 2002); 45386 (February 1, 
2002), 67 FR 6062 (February 8, 2002) (extending the pilot through 
April 15, 2002); 45755 (April 15, 2002), 67 FR 19607 (April 22, 
2002) (extending the pilot through September 30, 2002); 46587 
(October 2, 2002), 67 FR 63180 (October 10, 2002) (extending the 
pilot through January 31, 2003); 47372 (February 14, 2003), 68 FR 
8955 (February 26, 2003) (extending the pilot through May 31, 2003); 
47951 (May 30, 2003), 68 FR 34448 (June 9, 2003) (extending the 
pilot through December 1, 2003); 48871 (December 3, 2003), 68 FR 
69097 (December 11, 2003) (extending pilot through June 30, 2004); 
49994 (July 9, 2004), 69 FR 42486 (July 15, 2004) (extending pilot 
through June 30, 2005); and 52326 (August 23, 2005), 70 FR 51394 
(August 30, 2005). provide sub-penny price improvement to an inbound 
order.
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    This proposed rule change would apply only in the Exchange's 
current trading model. Within the current model, an Exchange specialist 
(or any market maker handling a customer order) typically would provide 
sub-penny price improvement to an order either on a manual basis or 
through an automated pricing mechanism used by specialist firms to 
process orders that are not automatically executed within the 
Exchange's systems. The Exchange will re-address issues associated with 
sub-penny trading as part of the filing the Exchange will make to 
qualify as an ``Automated Trading Center'' under Regulation NMS.\9\
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    \9\ See 17 CFR 242.600(b)(4).
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2. Statutory Basis
    The CHX believes the proposal is consistent with the requirements 
of the Act and the rules and regulations thereunder that are applicable 
to a national securities exchange, and, in particular, with the 
requirements of Section 6(b).\10\ The Exchange believes that the 
proposed changes are consistent with Section 6(b)(5) of the Act,\11\ 
because they would promote just and equitable principles of trade; 
remove impediments to, and perfect the mechanism of, a free and open 
market and a national market system; and, in general, protect investors 
and the public interest by permitting trading to occur in sub-penny 
increments on the Exchange while providing protection to customer 
orders that are accepted or displayed in penny increments.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement of Burden on Competition

    The Exchange does not believe that the proposed rule changes would 
impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments Regarding the 
Proposed Rule Changes Received From Members, Participants or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Changes and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such other 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 the 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 proposal, as 
amended, is consistent with the Act. Comments may be submitted by any 
of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File No. SR-CHX-2005-36 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.

All submissions should refer to File No. SR-CHX-2005-36. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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

[[Page 76090]]

the principal office of the CHX. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File No. SR-CHX-2005-36 and should be submitted on or before January 
12, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-7670 Filed 12-21-05; 8:45 am]

BILLING CODE 8010-01-P