Document ID: SEC-2010-1988-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Stock Exchange, Inc.
Posted Date: 2010-12-23T05:00Z

[Federal Register Volume 75, Number 246 (Thursday, December 23, 2010)]
[Notices]
[Pages 80870-80872]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-32223]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63564; File No. SR-CHX-2010-25]

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change To Eliminate the Validated Cross Trade Entry Functionality

December 16, 2010.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on December 10, 2010, the Chicago Stock Exchange, Inc. (the 
``Exchange'' or ``CHX'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I and II below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons 
and is approving the proposed rule change on an accelerated basis.
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    \1\ 15 U.S.C.78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CHX proposes to amend its rules to eliminate the Validated 
Cross Trade Entry Functionality for Exchange-registered Institutional 
Brokers. The text of this proposed rule change is available on the 
Exchange's Web site at (http://www.chx.com) 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
    The Exchange proposes to amend its rules relating to the submission 
and execution of certain cross orders by CHX-registered Institutional 
Brokers (``Institutional Brokers'') by eliminating the ability of an 
Institutional Broker to execute trades on the Exchange's trading 
facilities outside of the Exchange's Matching System.\4\ Institutional 
Brokers represent a voluntary registration category of Exchange 
Participants and the provisions of Article 17 of the Exchange's Rules 
apply specifically to them. Institutional Brokers are deemed to be 
trading on the facilities of the Exchange.\5\ Institutional Brokers are 
the successors to the previous Floor Broker category and they largely 
handle orders from their customers on a manual basis.\6\
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    \4\ See, Article 20 for rules relating to the operation of the 
CHX Matching System.
    \5\ See, Securities Exchange Act Rel. No. 54550 (Sept. 29, 
2006), 71 FR 59563 (October 10, 2006) (SR-CHX-2006-05) at Section 
II.C. (Institutional Broker), note 65 and accompanying text.
    \6\ For example, an Institutional Broker Representative 
(``IBR'') may receive an order instruction from a customer over the 
telephone or some electronic means of communication (e.g., e-mail or 
instant message). The IBR is then responsible for entering the terms 
of the order into an electronic database (for the purpose of 
facilitating automated surveillance of such activity. See, Article 
11, Rule 3) and seeking execution thereof.
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    With the adoption and implementation of Regulation NMS (``Reg 
NMS''), the Exchange transitioned from its traditional floor-based, 
auction trading archetype to its current electronic trading model.\7\ 
In order to facilitate the handling and execution of orders by 
Institutional Brokers, Article 17 has provided a means by which 
Institutional Brokers could attempt to manually execute and report 
transactions outside the CHX Matching System while complying with the 
trade-through prohibitions of Reg NMS and the order priority rules of 
the

[[Page 80871]]

Exchange.\8\ The Exchange's Brokerplex order entry system, which is 
available for use by all Institutional Brokers, includes a 
functionality known as ``Validated Cross.'' The Validated Cross 
functionality allows an Institutional Broker to electronically validate 
whether a proposed cross transaction would constitute an improper 
trade-through under Reg NMS and/or violate the Exchange's priority 
rules before the trade can be consummated and reported. The purpose of 
the Validated Cross functionality has been to permit an Institutional 
Broker to receive an execution instruction from a customer, to 
immediately validate it within Brokerplex for compliance with 
applicable regulations and complete the full transaction reporting 
within a timeframe which is consistent with industry standards. By 
using this functionality, the broker and its customers could avoid 
being disadvantaged simply because the IBR was not able to type the 
trade data into the system before the National Best Bid or Offer 
(``NBBO'') and/or CHX order book changed.
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    \7\ See, Securities Exchange Act Rel. No. 54550 (Sept. 29, 
2006), 71 FR 59563 (October 10, 2006) (SR-CHX-2006-05).
    \8\ See, Reg NMS Rule 611 (Order Protection Rule); Article 20, 
Rule 8 (Operation of the Matching System).
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    Despite these apparent advantages, reliance on and usage of the 
Validated Cross functionality by Institutional Brokers has declined 
over time. Additionally, the Exchange has conducted an analysis of 
whether the Validated Cross allows Institutional Broker to submit 
trades which would be blocked if submitted as a regular cross order and 
has concluded that the Validated Cross is effective for that purpose 
only in a very small percentage of instances. Even though we are 
proposing to get rid of the Validated Cross functionality, 
Institutional Brokers will continue to have the ability to submit other 
cross orders to the CHX Matching System for execution. Given the 
additional systems and regulatory costs to maintaining the Validated 
Cross functionality, the Exchange is proposing to eliminate it within 
the Brokerplex trading application and delete the associated rule text. 
Since the Validated Cross was the only means by which an Institutional 
Broker could execute and report a trade on our facilities outside of 
the Matching System, the Exchange is also proposing to eliminate the 
clause in section (a) of Article 9, Rule 13 which referred to trades 
executed outside the Matching System by an Institutional Broker.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act in general,\9\ and furthers the objectives 
of Section 6(b)(5) in particular,\10\ 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. The elimination of the Validated Cross functionality 
available to Institutional Brokers will simplify the order entry 
process, eliminate certain regulatory concerns presented by the 
Validated Cross and reduce the burden on the Exchange to maintain 
overlapping order entry functionality.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 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 change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    No written comments were solicited or received.

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

    Within 45 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 self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove 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 proposed rule 
change 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 Number SR-CHX-2010-25 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CHX-2010-25. 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at 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 publicly available. All 
submissions should refer to File Number SR-CHX-2010-25 and should be 
submitted on or before January 13, 2011.

V. Commission's Findings and Order Granting Accelerated Approval of the 
Proposed Rule Change

    After careful consideration, 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.\11\ In

[[Page 80872]]

particular, the Commission finds that the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act,\12\ 
which requires, among other things, that the Exchange's rules be 
designed to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, 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. 
The Commission agrees with the Exchange that the elimination of the 
Validated Cross functionality will simplify CHX's order entry process, 
eliminate certain regulatory concerns presented by the Validated Cross 
functionality, and reduce the burden on the Exchange to maintain 
overlapping order entry functionality.\13\
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    \11\ In approving the proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ See supra Section II.A.2.
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    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\14\ for approving the proposed rule change prior to the 30th 
day after publication of notice in the Federal Register. The Exchange 
represents that accelerated approval will allow the Exchange to 
implement these changes prior to the application of its customary end-
of-the-year software change freeze, and thereby minimize the systems 
and operational risks it says are inherent to coding changes made late 
in the year. Further, accelerated approval of the proposed rule change 
will allow the Exchange to more quickly address certain regulatory 
concerns associated with the Validated Cross functionality.
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    \14\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-CHX-2010-25) be, and it 
hereby is, approved on an accelerated basis.
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    \15\ 15 U.S.C.78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-32223 Filed 12-22-10; 8:45 am]
BILLING CODE 8011-01-P