[Federal Register: November 9, 2004 (Volume 69, Number 216)]
[Notices]
[Page 65000-65002]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09no04-95]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-50620; File No. SR-CHX-2004-37]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the Chicago Stock Exchange,
Inc. Relating to the Trading of Nasdaq/NM Securities
November 2, 2004.
SUMMARY: Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934 (the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice hereby is
given that on October 29, 2004, the Chicago Stock Exchange,
Incorporated (``CHX'' or ``Exchange'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') the proposed rule
change as described in Items I, II and III below, which Items have been
prepared by the self-regulatory organization. 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 Exchange has requested a six-month extension of the pilot
relating to the trading of Nasdaq/NM securities on the Exchange.
Specifically, the pilot amended CHX Article XX, Rule 37 and CHX Article
XX, Rule 43. The pilot currently is due to expire on November 1, 2004.
The Exchange proposes that the pilot remain in effect on a pilot basis
through May 1, 2005. The text of the proposed rule change is available
at the principal offices of the CHX and at the Commission.
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 regarding the proposed rule change.
The text of these statements may be examined at the places specified in
Item IV below. 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
The Exchange has requested a six-month extension of the pilot
relating to the trading of Nasdaq/NM securities on the Exchange.
Specifically, the pilot amends CHX Article XX, Rule 37 and CHX Article
XX, Rule 43. The pilot currently is due to expire on November 1, 2004;
the Exchange proposes that the amendments remain in effect on a pilot
basis through May 1, 2005.
On May 4, 1987, the Commission approved certain Exchange rules and
procedures relating to the trading of Nasdaq/NM securities on the
Exchange.\3\ Among other things, these rules rendered the Exchange's
BEST Rule guarantee (CHX Article XX, Rule 37(a)) applicable to Nasdaq/
NM securities and made Nasdaq/NM securities eligible for the automatic
execution feature of the Exchange's Midwest Automated Execution System
(the ``MAX'' system).\4\
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\3\ See Securities Exchange Act Release No. 24424 (May 4, 1987),
52 FR 17868 (May 12, 1987) (order approving File No. SR-MSE-87-2);
see also Securities Exchange Act Release Nos. 28146 (June 26, 1990),
55 FR 27917 (July 6, 1990) (order expanding the number of eligible
securities to 100); 36102 (August 14, 1995), 60 FR 43626 (August 22,
1995) (order expanding the number of eligible securities to 500);
41392 (May 12, 1999), 64 FR 27839 (May 21, 1999)(order expanding the
number of eligible securities to 1000).
\4\ The MAX system may be used to provide an automated delivery
and execution facility for orders that are eligible for execution
under the Exchange's BEST Rule and certain other orders. See CHX
Rules, Art. XX, Rule 37(b). A MAX order that fits within the BEST
parameters is executed pursuant to the BEST Rule via the MAX system.
If an order is outside the BEST parameters, the BEST rule does not
apply, but MAX system handling rules remain applicable.
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On January 3, 1997, the Commission approved, on a one year pilot
basis, a program that eliminated the requirement that CHX specialists
automatically execute orders for Nasdaq/NM securities when the
specialist is not quoting at the national best bid or best offer
disseminated pursuant to SEC Rule 11Ac1-1 (the ``NBBO'').\5\ When the
Commission approved the program on a pilot basis, it requested that the
Exchange submit a report to the Commission describing the Exchange's
experience with the pilot program. The Commission stated that the
report should include at least six months of trading data. Due to
programming issues, the pilot program was not implemented until April
1997. Six months of trading data did not become available until
November 1997. As a result, the Exchange requested an additional three-
month extension to collect the data and prepare the report for the
Commission.
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\5\ See Securities Exchange Act Release No. 38119 (January 3,
1997), 62 FR 1788 (January 13, 1997).
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On December 31, 1997, the Commission extended the pilot program for
an additional three months, until March 31, 1998, to give the Exchange
additional time to prepare and submit the report and to give the
Commission adequate time to review the report prior to approving the
pilot on a permanent basis.\6\ The Exchange submitted the report to the
Commission on January 30, 1998. Subsequently, the Exchange requested
another three-month extension, in order to give the Commission adequate
time to approve the pilot program on a permanent basis. On March 31,
1998, the Commission approved the pilot for an additional three-month
period, until June 30, 1998.\7\ On July 1, 1998, the Commission
approved the pilot for an additional six-month period, until December
31, 1998.\8\ On December 31, 1998, the Commission approved the pilot
for an additional six-month period, until June 30, 1999.\9\ On June 30,
1999, the Commission approved the pilot for an additional seven-month
period, until January 31, 2000.\10\ On January 31, 2000, the Commission
approved the pilot for an additional three-month period, until May 1,
2000.\11\ On May 1, 2000, the Commission approved the pilot for an
additional six-month period, until November 1, 2000.\12\ On November
15, 2000, the Commission approved the pilot for an additional one-year
period, until November 1, 2001.\13\ On November 1, 2001, the pilot was
extended for an additional one-year period, until November 1, 2002.\14\
On November 1, 2002, the pilot was extended for an
[[Page 65001]]
additional one-year period, until November 1, 2003.\15\ On November 1,
2003, the pilot was extended for an additional one-year period until
November 1, 2004.\16\ In light of the evolving nature of the Nasdaq
market and unlisted trading of Nasdaq/NM securities, the Exchange now
requests another extension of the current pilot program, through May 1,
2005. The Exchange is not requesting approval of any changes to the
pilot in this submission.
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\6\ See Securities Exchange Act Release No. 39512 (December 31,
1997), 63 FR 1517 (January 9, 1998).
\ 7\ See Securities Exchange Act Release No. 39823 (March 31,
1998), 63 FR 17246 (April 8, 1998).
\8\ See Securities Exchange Act Release No. 40150 (July 1,
1998), 63 FR 36983 (July 8, 1998).
\9\ See Securities Exchange Act Release No. 40868 (December 31,
1998), 64 FR 1845 (January 12, 1999).
\10\ See Securities Exchange Act Release No. 41586 (June 30,
1999), 64 FR 36938 (July 8, 1999).
\11\ See Securities Exchange Act Release No. 42372 (January 31,
2000), 65 FR 6425 (February 9, 2000).
\12\ See Securities Exchange Act Release No. 42740 (May 1, 2000)
65 FR 26649 (May 8, 2000).
\13\ See Securities Exchange Act Release No. 43565 (November 15,
2000), 65 FR 71166 (November 29, 2000).
\14\ See Securities Exchange Act Release No. 45010 (November 1,
2001), 66 FR 56585 (November 8, 2001).
\15\ See Securities Exchange Act Release No. 46932 (November 29,
2002), 67 FR 72990 (December 9, 2002).
\16\ See Securities Exchange Act Release No. 48742 (November 3,
2003), 68 FR 63829 (November 10, 2003).
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Under the pilot program, specialists must continue to accept agency
market orders \17\ or marketable limit orders, but only for orders of
100 to 5099 shares in Nasdaq/NM securities. This threshold order
acceptance requirement is referred to as the ``auto acceptance
threshold.'' Specialists, however, must accept all agency limit orders
in Nasdaq/NM securities from 100 up to and including 10,000 shares for
placement in the limit order book. Specialists are required to
automatically execute Nasdaq/NM orders in accordance with certain
amendments to the pilot program that were approved by the
Commission.\18\
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\17\ The term ``agency order'' means an order for the account of
a customer, but does not include professional orders, as defined in
CHX Rules, Art. XXX, Rule 2, Interpretation and Policy .04. The rule
defines a ``professional order'' as any 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.
\18\ See Securities Exchange Act Release No. 44778 (September 7,
2001), 66 FR 48075 (September 17, 2001).
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The pilot program has no minimum auto execution threshold for
Nasdaq/NM securities. When a CHX specialist is quoting at the NBBO,
orders for a number of shares less than or equal to the size of the
specialist's quote are executed automatically (in an amount up to the
size of the specialist's quote). Orders of a size greater than the
specialist's quote are automatically executed up to the size of the
specialist's quote, with the balance of the order designated as an open
order in the specialist's book, to be filled in accordance with the
Exchange's rules for manual execution of orders for Nasdaq/NM
securities. Such rules dictate that the specialist must either manually
execute the order at the NBBO or a better price or act as agent for the
order in seeking to obtain the best available price for the order on a
marketplace other than the Exchange. If the specialist decides to act
as agent for the order, the pilot program requires the specialist to
use order-routing systems to obtain an execution where appropriate.
Orders for securities quoted with a spread greater than the minimum
variation are executed automatically after a fifteen second delay from
the time the order is entered into MAX. The size of the specialist's
bid or offer is then automatically decremented by the size of the
execution. When the specialist's quote is exhausted, the system
generates an autoquote at an increment away from the NBBO for 100
shares.
When the specialist is not quoting a Nasdaq/NM security at the
NBBO, an order that is of a size less than or equal to the auto
execution threshold designated by the specialist will execute
automatically at the NBBO price up to the size of the auto execution
threshold. Orders of a size greater than the auto execution threshold
will be designated as open orders in the specialist's book and manually
executed, unless the order-sending firm previously has advised the
specialist that it elects partial automatic execution, in which event
the order will be executed automatically up to the size of the auto
execution threshold, with the balance of the order to be designated as
an open order in the specialist's book.
Whether the specialist is quoting at the NBBO or not, ``oversized''
orders, i.e., orders that are of a size greater than the auto
acceptance threshold of 5099 shares (as designated by the specialist),
are not subject to the foregoing requirements, and may be canceled
within one minute of being entered into MAX or designated as an open
order.
2. Statutory Basis
The CHX believes that the proposed rule is consistent with Section
6(b) of the Act,\19\ generally, and Section 6(b)(5) of the Act \20\ in
that it is designed to promote just and equitable principles of trade,
to remove impediments and to perfect the mechanism of a free and open
market and a national market system, and, in general, to protect
investors and the public interest.
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\19\ 15 U.S.C. 78f(b).
\20\ 15 U.S.C. 78f(b)(5).
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C. Self-Regulatory Organization's Statement of Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any inappropriate burden on competition.
D. Self-Regulatory Organization's Statement on Comments Regarding 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
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \21\ and subparagraph (f)(6) of Rule 19b-4 \22\
thereunder because the proposal: (1) Does not significantly affect the
protection of investors or the public interest; (2) does not impose any
significant burden on competition; and (3) does not become operative
for 30 days from the date of filing, or such shorter time as the
Commission may designate if consistent with the protection of investors
and the public interest; provided that the Exchange has given the
Commission written notice of its intent to file the proposed rule
change at least five business days prior to the filing date of the
proposed rule change. At any time within 60 days of the filing of such
proposed rule change, the Commission may summarily abrogate such rule
change if it appears to the Commission that such action is necessary or
appropriate, in the public interest, for the protection of investors,
or otherwise in furtherance of the purposes of the Act.
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\21\ 15 U.S.C. 78s(b)(3)(A).
\22\ 17 CFR 240.19b-4.
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The Exchange has requested that the Commission waive the 5-day pre-
filing notification requirement and the 30-day operative delay. The
Commission believes that waiving the 5-day pre-filing notification
requirement and the 30-day operative delay is consistent with the
protection of investors and the public interest.\23\ The Commission
notes that waiver of the 5-day pre-filing requirement and acceleration
of the operative date will prevent the Exchange's pilot program
relating to the trade of Nasdaq/NM securities from lapsing, and will
allow the current rules to remain effective.
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\23\ For purposes only of accelerating the operative date of
this proposal, the Commission has considered the proposed rule's
impact on efficiency, competition, and capital formation. 15 U.S.C.
78c(f).
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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:
[[Page 65002]]
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-2004-37 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-CHX-2004-37. 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 Section, 450 Fifth
Street, NW., Washington, DC 20549. Copies of such filing also will be
available for inspection and copying at the principal offices of the
CHX. 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-
2004-37 and should be submitted on or before November 30, 2004.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E4-3075 Filed 11-8-04; 8:45 am]
BILLING CODE 8010-01-P