Document ID: SEC-2011-1437-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Stock Exchange, Inc.
Posted Date: 2011-09-26T04:00Z

[Federal Register Volume 76, Number 186 (Monday, September 26, 2011)]
[Notices]
[Pages 59476-59478]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-24588]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65354; File No. SR-CHX-2011-29]

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

September 19, 2011.
    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 September 14, 2011, the Chicago Stock Exchange, Inc. (``CHX'' 
or the ``Exchange'') 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 Exchange. 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

    CHX proposes to amend its rules regarding Exchange-registered 
Institutional Broker firms to clarify their status. 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 Changes

    In its filing with the Commission, the CHX included statements 
concerning the purpose of and basis for the proposed rule changes 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 Changes

1. Purpose
    The Exchange is proposing to add Interpretation and Policy .04 to 
Article 17, Rule 3 to clarify the status of Exchange-registered 
Institutional Broker firms (``Institutional Brokers'') as not operating 
on the Exchange. By this proposal, the Exchange believes that it will 
enable existing and new Institutional Broker firms to engage in trading 
activities in a less restrictive manner than is currently the case. The 
Exchange is also proposing to delete Article 20, Rule 7 (Clearing the 
Matching System) since that requirement is predicated on Institutional 
Brokers being considered as operating on the Exchange. Notwithstanding 
this redefinition of the status of Institutional Brokers, the Exchange 
continues to believe that a separate pricing schedule for orders 
submitted by Institutional Brokers for execution and/or submission for 
clearance and settlement is appropriate and represents an equitable 
allocation of fees for Exchange Participants.
    Institutional Brokers are an elective sub-category of Exchange 
Participants requiring registration with the Exchange. In addition to 
the other provisions of Exchange rules, Institutional Brokers are 
subject to the obligations of Article 17 of the CHX rules. 
Institutional Broker firms typically provide manual order handling and 
execution services for other broker-dealers or institutional clients, 
and are the successors to the floor brokers under the Exchange's 
previous floor-based, auction trading model. This model was eliminated 
as part of the implementation of Regulation NMS and Exchange's 
transition to its New Trading Model, which features an electronic limit 
order matching system as its core trading facility.\3\ The Commission's 
order approving the Exchange's New Trading Model noted, ``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.\4\'' Although an Institutional Broker has traditionally been 
deemed to be operating on the Exchange, due to certain changes in their 
function the CHX is proposing to treat Institutional Brokers as no 
longer operating on the Exchange. As such, an order that is sent to an 
Institutional Broker shall not be

[[Page 59477]]

deemed to be ``on the Exchange'' unless and until such order is entered 
into the Exchange's Matching System.
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    \3\ The Exchange replaced its traditional auction marketplace 
with its New Trading Model beginning in 2006. See Securities 
Exchange Act Rel. No. 54550 (Sept. 29, 2006), 71 FR 59563 (Oct. 10, 
2006) (SR-CHX-2006-05).
    \4\ Id., Section II.C. Institutional Brokers.
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    New Interpretation and Policy .04 to Rule 3 of Article 17 would 
define an Institutional Broker firm as a CHX Participant firm which 
voluntarily elects to register with the Exchange as such, and satisfies 
the Exchange's requirements as set forth in Article 17. Under the 
current proposal, an Institutional Broker firm shall not be regarded as 
operating on the Exchange.\5\ Until fairly recently, Institutional 
Brokers were permitted to execute trades outside the Exchange's core 
trading facility, the Matching System, while still considered to be on 
the Exchange. Utilizing a functionality known as the Validated Cross, 
Institutional Brokers were able to execute 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.\6\ In December 2010, however, the Exchange eliminated the 
Validated Cross functionality and ability of Institutional Brokers to 
execute transactions on the CHX otherwise than through the Matching 
System.\7\ Given this change, 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. The 
Exchange is also proposing 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.\8\
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    \5\ Orders submitted by Institutional Brokers to the CHX's 
Matching System would be regarded as being on the Exchange.
    \6\ See, e.g., CHX Market Regulation Department Information 
Memorandum MR-07-9 (Dec, 6, 2007).
    \7\ See Securities Exchange Act Rel. No. 63564 (Dec. 16, 2010), 
75 FR 80870 (Dec. 23, 2010) (SR-CHX-2010-25).
    \8\ In Article 11, Rule 3(e), we have added language requiring 
that Institutional Brokers and Market Makers be registered with the 
Exchange for the provisions to be applicable.
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    The Exchange is further proposing 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. Given 
that Institutional Brokers will no longer be treated as operating on 
Exchange, the CHX does not believe that these restrictions are 
appropriate. Broker-dealers which are not part of our facilities should 
have the freedom to route orders to any destination.\9\ Consequently, 
we are proposing to delete these requirements from our rules.
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    \9\ Such ability to route orders to any market center is also 
consistent with CHX Article 9, Rule 24 which states ``No rule, 
stated policy or practice of this exchange shall prohibit or 
condition, or be construed to prohibit, condition or otherwise 
limit, directly or indirectly, the ability of any Participant to 
effect any transaction otherwise than on this exchange in any 
reported security listed and registered on this exchange or as to 
which unlisted trading privileges on this exchange have been 
extended which is not a covered security.''
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    Pursuant to this proposal, an Institutional Broker would not be 
considered as operating on the Exchange and its trading activity within 
the Matching System would be treated the same as any other order 
sending Participant which is not registered as an Institutional Broker, 
except as to fees as discussed below. Currently, Institutional Brokers 
are not permitted to execute transactions directly in the over-the-
counter (``OTC'') marketplace since they are regarded as being part of 
the Exchange's trading facilities.\10\ Since the proposed 
Interpretation and Policy would define Institutional Brokers as being 
``off-Exchange,'' those restrictions would no longer exist and 
Institutional Brokers would be permitted to execute trades directly in 
the OTC marketplace, subject to the rules of the appropriate self-
regulatory organization (``SRO'').\11\ Accordingly, the Exchange is 
proposing to clarify in Article 17, Rule 1 that Institutional Brokers 
can effect transactions on the Exchange and in other market centers 
since Institutional Brokers will no longer be deemed to be operating on 
the Exchange.
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    \10\ 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.
    \11\ Currently, the SRO for the OTC marketplace is FINRA.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act in general,\12\ and furthers the 
objectives of Section 6(b)(5) in particular,\13\ 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 by redefining Institutional Brokers 
as no longer operating on the Exchange. With the repeal of the 
Validated Cross functionality and rules, there is no longer any reason 
to treat Institutional Brokers as trading directly from the Exchange's 
facilities. The proposed redefinition of the role of Institutional 
Brokers properly aligns our rules with the current operation of those 
firms and will permit them to more effectively compete with other 
broker-dealers and serve the interests of their customers and 
investors. The elimination of the requirement of Institutional Brokers 
to clear the Matching System before sending customer orders to other 
trading centers will likewise assist them in competing with other 
broker-dealers in a free and open market, and will allow them to better 
serve the interests of their customers and investors.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \14\ in general, and furthers the 
objectives of Section 6(b)(4) of the Act \15\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among members and other persons using any facility or 
system which the Exchange operates or controls by continuing to provide 
for separate billing rates for transactions executed or handled by an 
Institutional Broker. The Exchange currently assesses separate fees and 
charges for transactions which are submitted to the CHX by 
Institutional Brokers.\16\ These fees are charged to the Participant 
firm in whose name the transactions are submitted for clearance and 
settlement. Typically, the Institutional Broker acts as agent for the 
Participant or for a correspondent thereof if the Participant is a 
clearing firm. In general, the fee rates associated with transactions 
submitted through an Institutional Broker may be higher than other 
transactions submitted directly into the Matching System, although 
there is a ceiling or cap for such charges which may make the overall 
fee lower in some circumstances. Despite the reclassification of 
Institutional Brokers as ``off-Exchange,'' the CHX continues to believe 
that the separate billing structure for transactions submitted through 
an Institutional Broker is appropriate and represents an equitable 
allocation of fees to Participants.
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    \14\ 15 U.S.C. 78f.
    \15\ 15 U.S.C. 78f(b)(4)
    \16\ See CHX Fee Schedule, Sections E.3. and E.7.
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    The Exchange provides trading and support technology services to 
Institutional Brokers without separate charges in order to facilitate 
their transactions on and through the Exchange. For example, the 
Exchange

[[Page 59478]]

makes the Brokerplex[supreg] order management and recordation system 
available to Institutional Brokers without charge.\17\ Brokerplex is 
used by Institutional Brokers to receive, transmit and hold orders from 
their clients while seeking execution within the CHX Matching System or 
elsewhere in the National Market System. Reports of orders, including 
the terms of any executions thereof, submitted via Brokerplex are kept 
by the system. The Exchange also provides operational and back office 
support services to Institutional Brokers using Brokerplex to handle 
orders and execute transactions on the Exchange. Finally, the Exchange 
expends a significant amount of its regulatory resources policing the 
activities of Institutional Brokers. The separate fee structure for 
orders submitted through Institutional Brokers helps offset these 
expenses. The Exchange also provides a credit in its Fee Schedule to 
Institutional Brokers in their monthly billings based upon a percentage 
of revenue generated to the Exchange as a result of transactions 
submitted by that Institutional Broker. This arrangement benefits the 
Exchange by incenting Institutional Brokers to register with the CHX 
under Article 17 and direct orders to the Exchange for execution.
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    \17\ Use of the Brokerplex system satisfies the requirement that 
Institutional Brokers handle orders within an integrated electronic 
system. Article 17, Rule 3.b.
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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 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 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) As the Commission may 
designated 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 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-2011-29 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-2011-29. 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 website 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 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-2011-29 and should be 
submitted on or before October 17, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-24588 Filed 9-23-11; 8:45 am]
BILLING CODE 8011-01-P