Document ID: SEC-2007-0577-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Chicago Stock Exchange, Inc.
Posted Date: 2007-04-20T04:00Z

[Federal Register: April 20, 2007 (Volume 72, Number 76)]
[Notices]               
[Page 19998-19999]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20ap07-129]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55625; File No. SR-CHX-2007-08]

 
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change To Expand Its Price 
Manipulation Rule To Address Additional Instances of Improper Behavior

April 12, 2007.
    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 March 21, 2007, 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 substantially 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\ 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 Exchange proposes to amend its rule relating to price 
manipulation to address two separate instances of improper activity: 
(1) Manipulative conduct consisting of a single event (in addition to a 
series of events, as the current rule contemplates) and (2) 
manipulation based upon the entry of orders as opposed to that based 
solely upon the entry of trades. The text of the proposed rule change 
is available at the Exchange, the Commission's Public Reference Room, 
and http://www.chx.com/rules/proposed_rules.htm.

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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Through this proposal, the Exchange seeks to amend its rule 
relating to price manipulation to address two separate instances of 
improper activity: (1) Manipulative conduct consisting of a single 
event (in addition to a series of events, as the current rule 
contemplates) and (2) manipulation based upon the entry of orders as 
opposed to that based solely upon the entry of trades.\3\
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    \3\ The proposal would also expand the rule to address conduct 
by persons associated with a participant firm, in addition to the 
firm's partners, directors, officers and registered employees.
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    As an initial matter, the Exchange believes that these changes to 
the rule would appropriately establish that improper price manipulation 
could occur, in certain circumstances, when orders are entered at 
successively higher or lower prices, not just upon the execution of a 
series of trades at successively higher or lower prices. Order-based 
manipulation, sometimes called spoofing, may be intended to take 
advantage of algorithms or electronic traders who focus on changes to 
the bid or offer in trading. In such situations,

[[Page 19999]]

the bad actor may enter higher, non-marketable bids (offers) in one 
market center in order to induce market participants to lift an offer 
(hit a bid) which he has posted in the same or different market 
center.\4\
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    \4\ Other order-based manipulative activity might occur with the 
upcoming implementation of the new market data revenue allocation 
formula under Regulation NMS--which, in general, requires that 
market data revenue be allocated based upon both quoting and trading 
activity in each market. The entry of orders (which are designed not 
be executed) could be used to create a false, misleading, or 
artificial appearance of quoting activity in a particular security 
within a particular market.
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    Additionally, the Exchange believes that the proposed changes to 
the rule would appropriately establish that improper price manipulation 
could occur, in certain circumstances, when a single execution occurs 
(or a single order is entered) at a price higher than (or lower than) 
the current market. A single trade that is executed at a significantly 
higher or lower price at the end of the trading day, for example, could 
be used to establish a price which does not reflect the true state of 
the market in that security, to the benefit of a participant firm.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act,\5\ in general, and Section 6(b)(5) of the Act,\6\ in 
particular, 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 expanding the 
price manipulation rule to address additional instances of improper 
behavior.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 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

    The Exchange did not solicit or receive any written comments with 
respect to the proposed rule change.

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 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 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-2007-08 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-2007-08. 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 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-2007-08 and should be submitted on or before May 11, 
2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-7492 Filed 4-19-07; 8:45 am]

BILLING CODE 8010-01-P