Document ID: SEC-2007-1550-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Chicago Stock Exchange, Inc.
Posted Date: 2007-11-15T05:00Z

[Federal Register: November 15, 2007 (Volume 72, Number 220)]
[Notices]               
[Page 64262-64263]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15no07-111]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56771; File No. SR-CHX-2005-34]

 
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Amendment No. 1 Thereto 
Regarding Cancellation of the Stock Leg of a Stock-Option Order and 
Notice of Filing and Order Granting Accelerated Approval of Amendment 
No. 3 Thereto

November 8, 2007.

I. Introduction

    On November 14, 2005, the Chicago Stock Exchange, Inc. (``CHX'' or 
``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 permit the cancellation of the stock leg of a 
stock-option order \3\ if market conditions in a non-Exchange market 
prevent the options leg of the order from being executed at the agreed 
upon price. On July 11, 2006, the Exchange submitted Amendment No. 1 to 
the proposed rule change. The proposed rule change, as amended, was 
published for comment in the Federal Register on July 27, 2006.\4\ The 
Commission received no comments regarding the proposal. The Exchange 
filed Amendment No. 2 to the proposed rule change on October 22, 2007, 
and withdrew Amendment No. 2 on November 5, 2007. On November 5, 2007, 
CHX filed Amendment No. 3 to the proposal.\5\ This order approves the

[[Page 64263]]

proposed rule change, as amended. In addition, the Commission is 
publishing notice to solicit comment on, and is simultaneously 
approving on an accelerated basis, Amendment No. 3 to the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ A ``stock-option order'' would be defined as an order to buy 
or sell a stated number of units of an underlying or a related 
security coupled with either (i) the purchase or sale of option 
contract(s) on the opposite side of the market representing either 
the same number of units of the underlying or related security or 
the number of units of the underlying security necessary to create a 
delta-neutral or delta-hedged position or (ii) the purchase or sale 
of an equal number of put and call option contracts, each having the 
same exercise price, expiration date and each representing the same 
number of units of stock as, and on the opposite side of the market 
from, the underlying or related security portion of the order. See 
CHX's proposed Interpretation and Policy .01(b) to Rule 9 under 
Article 20.
    \4\ See Securities Exchange Act Release No. 54185 (July 20, 
2006), 71 FR 42693 (``Notice'').
    \5\ In Amendment No. 3, CHX made revisions to the proposed rule 
text and purpose section of the proposal to conform the proposal 
with changes to the Exchange's trading model that were approved by 
the Commission after publication of the Notice. See Securities 
Exchange Act Release No. 54550 (September 29, 2006), 71 FR 59563 
(October 10, 2006). In addition, in Amendment No. 3 CHX added a 
representation to the proposal that would require CHX to establish a 
special trade indicator for stock-option orders prior to the 
proposal becoming operative.
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II. Description of Proposal

    The Exchange proposes to amend Exchange Rule 9 under Article 20 to 
add new Interpretation and Policy .01, to permit the cancellation of 
the stock leg of a stock-option order if market conditions in a non-
Exchange market prevent the options leg of the order from being 
executed at the agreed-upon price.\6\ The market conditions that would 
be sufficient to justify cancellation of the stock leg of a stock-
option order include a sudden change in the price of the options 
involved in the transaction prior to execution of the trade or a 
trading halt or systems failure that precludes immediate execution of 
the options leg at the agreed upon price. The Exchange's proposed rule 
also would require CHX floor participants that handle stock-option 
orders that are cancelled in accordance with the proposed rule to 
maintain records ``sufficient to establish that market conditions in a 
non-Exchange market prevented the execution of the option leg(s).'' \7\
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    \6\ CHX represented that the stock leg of a stock-option order 
always would be presented to the CHX with an identified buyer and 
seller who have agreed to the terms of the trade, and that both the 
buyer and seller would be aware of the possibility that the stock 
leg of a stock-option order may be cancelled on the CHX if the 
corresponding options leg is not executed because of market 
conditions. See Notice, supra note 5.
    \7\ See CHX's proposed Interpretation and Policy .01(c) to 
Exchange Rule 9 under Article 20.
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    In Amendment No. 3 to the proposed rule change, the Exchange 
amended the proposed Interpretation and Policy .01 to state that it 
would not become operative until a special trade indicator to identify 
stock transactions that are part of stock-option orders is implemented. 
The purpose of this trade indicator would be to provide notice to 
market participants that these stock trades could be cancelled. This 
trade indicator must be used on such transactions reported through the 
Consolidated Tape Association Plan and the Nasdaq/UTP Plan.

III. Discussion and Commission Findings

    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.\8\ In 
particular, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\9\ which requires, among other things, that 
the rules of a national securities exchange be 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. The 
Commission notes that the Exchange's proposed Interpretation and Policy 
.01 to Exchange Rule 9 under Article 20 is substantially similar to 
current Rule 6.48(b) of the Chicago Board Options Exchange, 
Incorporated, which permits cancellation of the options leg of a stock-
option order under the same circumstances described in the Exchange's 
proposed rule. Accordingly, the Commission finds that it is reasonable 
for the Exchange to provide CHX floor participants with the ability to 
cancel the stock leg of a stock-option order in certain limited 
circumstances when market conditions prevent the completion of the 
options leg of the order.
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    \8\ In approving this proposed rule change the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Commission also finds good cause for approving Amendment No. 3 
to the proposed rule change prior to 30 days after the date of 
publication of notice of filing thereof in the Federal Register. This 
amendment will ensure that, before the proposed rule change becomes 
operative, an indicator is developed that will make transparent the 
potential cancellation of stock-option orders. Accordingly, the 
Commission finds good cause for approving Amendment No. 3 to the 
proposed rule change on an accelerated basis.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 3 to the proposed rule change, 
including whether Amendment No. 3 to 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 No. SR-CHX-2005-34 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CHX-2005-34. 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, 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 NYSE. 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 Number SR-CHX-2005-34 and should be 
submitted on or before December 6, 2007.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-CHX-2005-34), as amended, is 
approved, and that Amendment No. 3 to the proposed rule change (SR-CHX-
2005-34) is approved on an accelerated basis.
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    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-22336 Filed 11-14-07; 8:45 am]

BILLING CODE 8011-01-P