Document ID: SEC-2006-1394-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Chicago Stock Exchange, Inc.
Posted Date: 2006-10-30T05:00Z

[Federal Register: October 30, 2006 (Volume 71, Number 209)]
[Notices]               
[Page 63372-63374]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30oc06-140]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54642; File No. SR-CHX-2006-30]

 
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change To Permit Routing From the 
Matching System to a Destination Selected by a Participant

 October 23, 2006.
    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 October 19, 2006, the Chicago Stock Exchange, Inc. (``CHX'' or 
``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. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 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 permit its participants to 
identify a destination to which an order should be routed when its 
execution would improperly trade through other markets or its display 
would improperly lock or cross other markets. The text of the proposed 
rule change appears below. Additions are italicized; deletions are 
[bracketed].
RULES OF CHICAGO STOCK EXCHANGE, INC.
ARTICLE 20
Prevention of Trade-Throughs
* * * * *
    RULE 5.a. An inbound order for at least a round lot is not eligible 
for execution on the Exchange if its execution would cause an improper 
trade-through of another ITS market or, when Reg NMS is implemented for 
a security, if its execution would be improper under Rule 611 (but not 
including the exception set out in Rule 611(b)(8)) (together an 
``improper trade-through''). As described in Interpretation and Policy 
.03, if the execution of all or part of an inbound order for at least a 
round lot on the Exchange would cause an improper trade-through, that 
order (or the portion of that order that would cause a trade-through) 
shall be routed to another appropriate market or, if designated as ``do 
not route,'' automatically cancelled; provided, however, that if an 
undisplayed order is resting in the Matching System and the execution 
of an inbound round lot order (that is not an IOC or FOK order) against 
the undisplayed resting order would cause an improper trade-through, 
the resting order shall be cancelled to the extent necessary to allow 
the inbound order to be executed or quoted.
    b. Inbound odd lot orders and odd lot crosses shall be eligible for 
execution on the Exchange even if the execution would trade through 
another market's bid or offer.
    * * * Interpretations and Policies:
* * * * *
    .03 Routing to other markets when execution in Matching System 
would cause a trade-through. As described above, an inbound round lot 
order is not eligible for execution on the Exchange if its execution 
would cause an improper trade-through of another market's quotations. 
If the execution of all or a part of an inbound round-lot order on the 
Exchange would cause an improper trade-through, that order (or a 
portion of that order) shall be routed to another destination or, if 
designated as ``do not route,'' automatically cancelled. Routing to 
other destinations (``Routing Services'') shall occur as follows:
    a. Cross with satisfy/outbound ISO. If a Participant has submitted 
a cross with satisfy or an outbound ISO and its execution would cause 
an improper trade-through, the Matching System shall execute that order 
and simultaneously route orders or commitments necessary to satisfy the 
bids or offers of other markets [(the ``Routing Services'')]. The 
Exchange's systems will determine when, how and where these orders (or 
commitments) should be routed. These orders will be routed, at the 
Participant's election, either through the NMS Linkage System (or any 
later linkage that supersedes the NMS Linkage System) or through the 
connectivity provided by a routing services provider with whom the 
Exchange has negotiated an access agreement.
    b. All other situations. In all other situations, if the execution 
of all or a part of an inbound round lot order would cause a trade-
through, and the Participant has not identified the order as ``do not 
route,'' the Matching System shall route the order to another venue, 
according to each Participant's instructions. The Participant will be 
responsible for ensuring that it has a relationship with its chosen 
destination to permit the requested access. The Exchange shall not have 
responsibility for the handling of the order by the other destination, 
but will report any execution or cancellation of the order by the other 
destination to the Participant that submitted the order and will notify 
the other venue of any cancellations or changes to the order submitted 
by the order-sending Participant.
    c [a]. The Exchange will provide its Routing Services pursuant to 
the terms of three separate agreements, to the extent that they are 
applicable to a specific routing decision: (1) an agreement between the 
Exchange and each Participant on whose behalf orders will be routed 
(``Participant-Exchange Agreement''); (2) an agreement between each 
Participant and a specified third-party broker-dealer that will use its 
routing connectivity to other markets and serve as a ``give-up'' in 
those markets (``Give-Up Agreement''); and (3) an agreement between the 
Exchange and the specified third-party broker-dealer (``Routing 
Connectivity Agreement'') pursuant to which the third-party broker-
dealer agrees to provide routing connectivity to other markets and 
serve as a ``give-up'' for the Exchange's Participants in other 
markets. The Routing Connectivity Agreement will include terms and 
conditions that enable the Exchange to comply with this Interpretation 
and Policy .03.

[[Page 63373]]

    d [b]. The Exchange will provide Routing Services in compliance 
with these rules and with the provisions of the Act and the rules 
thereunder, including, but not limited to, the requirements of sections 
6(b)(4) and (5) of the Act that the rules of a national securities 
exchange provide for the equitable allocation of reasonable dues, fees 
and other charges among its members and issuers and other persons using 
its facilities, and not be designed to permit unfair discrimination 
between customers, issuers, brokers or dealers.
    [c. In providing the Routing Services, the Exchange will use its 
own systems to determine when, how and where orders (or commitments) 
are routed away to other markets.]
    [d. The Routing Connectivity Agreement will include terms and 
conditions that enable the Exchange to comply with this Interpretation 
and Policy .03.]
    e. The Exchange will establish and maintain procedures and internal 
controls reasonably designed to adequately restrict the flow of 
confidential and proprietary information between the Exchange 
(including its facilities) and the third-party broker-dealer, and, to 
the extent the third-party broker-dealer reasonably receives 
confidential and proprietary information, that adequately restrict the 
use of such information by the third party broker-dealer to legitimate 
business purposes necessary to provide routing connectivity and to 
serve as a ``give-up.''
    [(In addition to these Routing Services, the Exchange is developing 
a functionality that would, in all other situations where the execution 
of all or a part of an inbound order for at least a round lot would 
cause a trade-through, and the Participant has not identified the order 
as ``do not route,'' route all or a part of the order to another 
destination, according to each Participant's instructions. This 
functionality will only be implemented if these rules are amended to 
define the functionality in more detail).]
* * * * *
Locked and Crossed Markets
    RULE 6. a.-c. No change to text.
    d. Matching System operation. Except as permitted in paragraph (c) 
above, an order is not eligible for display on the Exchange if its 
display would improperly lock or cross the ITS best bid or offer, or, 
when Reg NMS is implemented for a security, if its display would lock 
or cross a protected quotation. These orders shall be routed, pursuant 
to the provisions of Rule 5, Interpretation .03 above, to another 
destination of the Participant's choice [appropriate market] or, if 
designated as ``do not route,'' automatically cancelled.
* * * * *

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 on the proposed rule change. 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 new trading model rules, the Exchange's 
Matching System will not execute an order if its execution would cause 
an improper trade-through of another ITS market or, when Regulation NMS 
is implemented, if its execution would be improper under Rule 611 of 
Regulation NMS \3\ (together an ``improper trade-through'').\4\ 
Similarly, the Exchange's Matching System will not display an order if 
its display would improperly lock or cross other markets.\5\
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    \3\ 17 CFR 242.611.
    \4\ See CHX Article 20, Rule 5.
    \5\ See CHX Article 20, Rule 6.
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    Through this proposal, the Exchange seeks to adopt rules that would 
allow the Exchange, in these situations, to either cancel the order 
back to the participant that submitted it or to route the order to the 
destination of the participant's choice, all at the direction of the 
participant. Under this proposal, the participant would be responsible 
for ensuring that it has a relationship with its chosen destination to 
permit the requested access.\6\ The Exchange would not be involved in 
the execution of the order--any execution of the order would be the 
responsibility of the destination to which the order was sent. The 
Exchange, however, would report any execution or cancellation of the 
order by the other destination to the participant that submitted the 
order and would notify the other venue of any cancellations or changes 
to the order submitted by the order-sending participant.\7\ The 
Exchange would provide these routing services pursuant to these 
proposed rules and a separate agreement between the Exchange and each 
participant on whose behalf orders would be routed.\8\
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    \6\ See CHX Article 20, Rule 5, proposed Interpretation and 
Policy .03(b).
    \7\ See CHX Article 20, Rule 5, proposed Interpretation and 
Policy .03(b).
    \8\ See CHX Article 20, Rule 5, proposed Interpretation and 
Policy .03(c).
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    The Exchange believes that the proposed routing of orders as set 
forth above would be a facility of the Exchange, but that the 
destinations chosen by each participant would not constitute an 
Exchange facility. As a result, the Exchange would submit fee changes, 
and any applicable changes to its rules, to the Commission as required 
by Rule 19b-4 under the Act in connection with its routing.\9\ The 
Exchange's rules and fees, however, would not address the fees or 
manner of operation of any destination to which the participant asked 
that an order be routed. Additionally, the Exchange would provide these 
routing services in compliance with its rules and with the provisions 
of the Act and the rules thereunder, including, but not limited to, the 
requirements of Sections 6(b)(4) and (5) of the Act,\10\ which require 
that the rules of a national securities exchange provide for the 
equitable allocation of reasonable dues, fees and other charges among 
its members and issuers and other persons using its facilities, and not 
be designed to permit unfair discrimination between customers, issuers, 
brokers or dealers.\11\
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    \9\ 17 CFR 240.19b-4.
    \10\ 15 U.S.C. 78f(b)(4)-(5).
    \11\ See CHX Article 20, Rule 5, proposed Interpretation and 
Policy .03(d).
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2. Statutory Basis
    The CHX believes that 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).\12\ The CHX believes that the 
proposal is consistent with Section 6(b)(5) of the Act \13\ in that it 
is 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 by confirming that, when the 
execution of an order would improperly trade through another market (or 
the display of an order would improperly lock or cross another market), 
the Exchange may follow a participant's instructions

[[Page 63374]]

in either cancelling the order back to the participant or routing the 
order to a destination of the participant's choice.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition.

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

    No written comments were either solicited or received.

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

    Within 35 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 Exchange consents, the Commission will:
    (A) By order approve such 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-2006-30 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-CHX-2006-30. 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 the 
filing also will be available for inspection and copying at the 
principal office of the Exchange. 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-2006-30 and should be submitted on or before 
November 20, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-18083 Filed 10-27-06; 8:45 am]

BILLING CODE 8011-01-P