Document ID: SEC-2005-0160-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Chicago Stock Exchange, Inc.
Posted Date: 2005-10-28T04:00Z

[Federal Register: October 28, 2005 (Volume 70, Number 208)]
[Notices]               
[Page 62152-62154]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28oc05-79]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52647; File No. SR-CHX-2005-01]

 
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change and Amendment Nos. 1 and 2 
Thereto Relating to the Exchange's Order Priority Rule and the 
Mandatory Use of Order Match Functionalities

October 21, 2005.
    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 February 3, 2005, 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 Exchange. On 
September 16, 2005, the Exchange filed Amendment No. 1 to the proposed 
rule change.\3\ On October 6, the Exchange filed Amendment No. 2 to the 
proposed rule change.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Form 19b-4 dated September 16, 2005 (``Amendment No. 1). 
Amendment No. 1 replaced the original filing in its entirety.
    \4\ Amendment No. 2 was a partial amendment in which the 
Exchange corrected errors in the previously filed Exhibit 4. The 
Exhibit 4 included in Amendment No. 2 replaced the previously filed 
Exhibit 4 in its entirety.
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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 Exchange Article XXX, Rule 2, 
Precedence to Orders in Book, to clarify the requirements of the 
Exchange's priority rule and to require specialists to make use of 
Exchange-provided order match functionalities. The text of the proposed 
rule change is available on the Exchange's Web site (http://www.chx.com/rules/proposed_rules.htm
), at the Exchange's Office of the 

Secretary, and at 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 Exchange 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 Exchange 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's rules generally require Exchange specialists to give 
precedence to orders in their books for the purchase or sale of 
securities over orders that originate with the specialists as 
dealers.\5\ Although specialists are not required to yield precedence 
to professional orders in certain circumstances, specialists are not 
permitted to trade ahead of customer orders.\6\
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    \5\ See Exchange Article XXX, Rule 2, Precedence to Orders in 
Book.
    \6\ If a specialist accepts a professional order for the book 
that the specialist is not required to accept under the rules and 
policies of the Exchange, the specialist is not required to yield 
precedence to that order over the specialist's principal interest if 
the orders that originate from the specialist and its customer are 
limit orders at the same price and the specialist is displaying its 
interest through the quotation system. See Exchange Article XXX, 
Rule 2. Under the Exchange's rules, a ``professional'' order is an 
order for the account of a broker-dealer, the account of an 
associated person of a broker-dealer, or any account in which a 
broker-dealer or an associated person of a broker-dealer has any 
direct or indirect interest. See Exchange Article XXX, Rule 2, 
Interpretations and Policy .04.
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    The Exchange's systems incorporate several different order match 
functionalities that are designed to replace proposed specialist 
executions on a principal basis with executions of eligible customer 
orders in the specialist's book. These functionalities, among other 
things, prevent a specialist from manually executing an order on a 
principal basis when there is a customer

[[Page 62153]]

order on the same side of the book that is eligible for execution.
    The Exchange's specialist firms have confirmed to the Exchange that 
they desire to, and are, using the Exchange-provided order match 
functionalities that are available to them. The proposed rule change 
would require specialists to continue such use, except when there are 
system problems with the order match functionalities \7\ or, when two 
specific types of exceptions arise. The Exchange believes that the 
proposed rule change would benefit investors by preventing potential 
trading ahead violations from occurring.
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    \7\ The Exchange does not anticipate that systems problems will 
occur frequently, but has included this exception to the rule to 
address those relatively rare circumstances when the order match 
functionality is not operating properly due to unexpected 
consequences of unrelated systems changes or a software failure. 
This exception is not intended to allow participants to avoid the 
use of order match functionalities, but to recognize that there 
could be limited circumstances when the order match functionalities 
are malfunctioning. The Exchange anticipates that it would work 
quickly to correct any software or systems problems that prevented 
the use of the order match functionalities.
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    The two exceptions to the general rule requiring use of order match 
functionalities are relatively narrow. First, the current rule change 
proposal would add an interpretation to the Exchange's rules to clarify 
a specialist's obligation to yield precedence to orders when receiving 
execution reports from other markets at the opening of the Exchange 
market. Specifically, the proposal would confirm that (1) when a 
specialist has sought liquidity in a specialty stock in another market 
with respect to one or more orders in the book, and (2) while waiting 
for an execution report from the other market, the specialist has 
executed the order(s) in the book, as principal, pursuant to the 
preopening order guarantee set out in the Exchange's rules, and (3) the 
specialist then receives the execution report(s) from the other market 
at a price equal to the execution(s) given the orders pursuant to the 
preopening order guarantee, the specialist shall not be required to 
fill any other customer order(s) in its book as a result of having 
received the execution report from the other market. These situations 
may arise at the opening of the Exchange market, in actively-traded 
stocks, when the Exchange's specialists receive execution reports from 
other markets after the Exchange receives notice of a print or quote 
that triggers the execution of preopening orders in the Exchange's 
specialist book.\8\ In these situations, a specialist has executed 
preopening orders at the guaranteed price and then receives a later 
report that he has been executed in another market that same price. The 
Exchange believes that it is appropriate to clarify its precedence rule 
to confirm that in such situations, a specialist should not be required 
to provide the execution it receives from another market to an order 
received after the Exchange's market opened.
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    \8\ Under Exchange rules, the Exchange generally is open for 
trading during the hours that a stock trades in its primary market. 
See Exchange Article IX, Rule 10(b). The opening of the Exchange's 
market is triggered, in most instances, when the Exchange receives a 
trade report or quote from other markets. For example, the 
Exchange's specialists fill orders received before the opening 
(``preopening orders'') in listed securities at the primary market 
opening trading price. Preopening orders in Nasdaq/NM securities are 
filled at a single price that is at or better than the national best 
bid or offer at the first unlocked, uncrossed market that occurs on 
or after 8:30 a.m. to the extent that buy and sell orders offset 
each other.
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    Additionally, the Exchange believes that when an Exchange 
specialist either (1) received an inbound ITS execution in satisfaction 
of another market center's trade-through of the Exchange's bid or offer 
(and the specialist has already filled the customer order(s) that 
constituted the bid or offer traded through); or (2) received an 
inbound ITS execution in satisfaction of a complaint lodged by an 
Exchange specialist against another market center, the specialist would 
not be required fill any other customer order(s) in his or its book as 
a result of having received the ``satisfying'' ITS execution.\9\
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    \9\ See Exchange Article XXX, Rule 2, proposed Interpretations 
and Policy .08.
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2. Statutory Basis
    The Exchange believes 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) of the Act.\10\ The Exchange 
believes the proposal is consistent with Section 6(b)(5) of the Act 
\11\ because the proposal 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. The Exchange 
believes that the proposed mandatory use of Exchange-provided order 
match functionalities is specifically designed to protect investor 
interests. The proposed clarification of the priority rule is designed 
to confirm the scope of the priority rule, providing both investors and 
specialists with a more detailed understanding of a specialist's 
obligations.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 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 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 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, as amended, 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-2005-01 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-CHX-2005-01. 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

[[Page 62154]]

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-2005-01 and should be 
submitted on or before November 18, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-5976 Filed 10-27-05; 8:45 am]

BILLING CODE 8010-01-P