[Federal Register: March 24, 2004 (Volume 69, Number 57)]
[Notices]
[Page 13924-13925]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24mr04-116]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49437; File No. SR-CHX-2003-24]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the Chicago Stock Exchange,
Incorporated Relating to the Definition of Primary Market
March 17, 2004.
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 August 14, 2003, the Chicago Stock Exchange, Incorporated (``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
January 29, 2004, the Exchange amended the proposed rule change.\3\ 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 Letter from Kathleen Boege, Associate General Counsel,
CHX, to Nancy Sanow, Assistant Director, Division of Market
Regulation, Commission, dated January 28, 2004 (``Amendment No.
1''). Amendment No. 1 replaces and supersedes the CHX's original
19b-4 filing 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 CHX Article XX, Rule 37(a)(3)(a),
which governs execution of resting limit orders based on certain
conditions in the primary market. Specifically, the proposed rule
change would permit the Exchange's Rules Subcommittee to designate the
primary market in each listed issue for purposes of determining limit
order execution guarantees to be offered on the CHX.
The text of the proposed rule change, as amended, is below.
Proposed new language is italicized; proposed deletions are in
[brackets].
* * * * *
Rule 37
(a) Guaranteed Executions
* * * * *
(1)-(2) No change to text.
(3) Execution of Agency Limit Orders. Subject to Interpretation and
Policy .10 (``Exempted Trade-Throughs''), all agency limit orders in
Dual Trading System issues will be filled under the following
circumstances:
(a) Exhaustion of primary market bid or offer. When the bid or
offering at the limit price has been exhausted in the primary market
(as designated by the Rules Subcommittee pursuant to Interpretation and
Policy .07 [defined in the CTA Plan]), agency limit orders will be
executed in whole or in part, based on the rules of priority and
precedence, on a share for share basis with trades executed at the
limit price in the primary market.
* * * * *
Interpretations and Policies:
* * * * *
.07 [[Reserved for future use]] Unless otherwise authorized by the
Exchange's Board of Governors, in designating the ``primary market''
for purposes of Rule 37(a)(3) of this Article XX, the Rules
Subcommittee shall designate the initial listing market for a security
as the primary market, unless that security is traded by either the New
York Stock Exchange (``NYSE'') or the American Stock Exchange
(``Amex''), in which case the primary market shall be the NYSE (for the
securities it trades) or the Amex (for the securities it trades). If a
security is traded on both the NYSE and the Amex, whichever exchange is
the initial listing market shall be designated as the primary market.
If the initial listing market is a market other than the NYSE or the
AMEX, but is traded by both the NYSE and the AMEX, the primary market
shall be the market with the largest trading volume in the subject
security, calculated on a twelve-month rolling basis.
* * * * *
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 proposed rule change would amend CHX Article XX, Rule
37(a)(3)(a), which governs execution of resting limit orders based on
certain conditions in the primary market. Specifically, the proposed
rule change would permit the Exchange's Rules Subcommittee to designate
the primary market in each listed issue for purposes of determining the
limit order execution guarantees to be offered on the CHX.
For many years, the CHX has guaranteed limit order protection,
i.e., execution of limit orders at the limit price based on certain
conditions in the primary market.\4\ The current version of CHX Article
XX, Rule 37(a)(3)(a) notes that the ``primary market'' is determined
using the CTA Plan definition of that term. Under the CTA Plan, the
primary market is the exchange where the greatest number of reportable
transactions in a particular security have taken place during the
preceding six-month period.\5\ As described below, the Exchange no
longer believes it is appropriate to base its limit order execution
guarantees on that definition of a primary market.
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\4\ Under the current version of CHX Article XX, Rule 37(a)(3),
all agency limit orders must be filled at the limit price when one
of three conditions occurs: (i) when the bid or offer in the primary
market has been exhausted, CHX agency limit orders are executed at
the limit price up to the volume of subsequent prints in the primary
market; (ii) when there is a price penetration in the primary
market, agency limit orders that have resided in the CHX
specialist's book for up to 15 seconds must be executed at the limit
price; and (iii) when the issue is trading at the limit price on the
primary market, CHX agency limit orders must be executed at the
limit price unless it can be demonstrated that such orders would not
have been executed at the limit price (or the broker and specialist
agree to a specific volume-related or other criteria for requiring a
fill).
\5\ See Second Restatement of Plan Submitted to the Securities
and Exchange Commission Pursuant to Rule 11A3-1 Under the Securities
Exchange Act of 1934, as amended and restated (the ``CTA Plan''), at
Section XI(a)(ii).
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The CHX believes that, as an initial matter, in today's
increasingly fragmented markets, the existing definition could result
in a constant re-designation of the primary market, as trading moves
from venue to venue. Moreover, the definition may cause the Exchange to
provide CHX limit order executions that are not desired by the
Exchange's order-sending firms and the investors they serve. In many
cases, customers may want their limit orders
[[Page 13925]]
protected against the listing market for a security, not against
another market that happens to have had the greatest number of
transactions during a given time period. The CHX believes that at a
minimum, continual re-designation of the primary market under the CTA
Plan definition could prove extremely confusing to CHX order-sending
firms and their customers. For these reasons, the Exchange believes
that another definition of primary market is amply warranted.
Under the proposed change, the Exchange's Rules Subcommittee would
be given the authority to define the primary market for listed
securities for purposes of determining the limit order execution
guarantees offered on the Exchange. As an initial matter, the Rules
Subcommittee intends to designate the initial listing market for a
security as the primary market, unless that security is traded by
either the New York Stock Exchange, Inc. (``NYSE'') or the American
Stock Exchange LLC (``Amex''); if the security is traded by one of
those markets, then the primary market would be the NYSE (for the
securities it trades) and the Amex (for the securities it trades). If a
security is traded on both the NYSE and the Amex, whichever of the two
is the initial listing market would be designated as the primary
market.\6\ If the initial listing market is a market other than the
NYSE or the Amex, but is traded by both the NYSE and the Amex, the
primary market shall be the market with the largest trading volume in
the subject security, calculated on a twelve-month rolling basis. The
Exchange believes that the designation guidelines outlined above will
ensure that the Rules Subcommittee consistently designates a market
that is a significant source of liquidity, to the benefit of customers
whose orders are routed to the CHX.
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\6\ If the Rules Subcommittee identifies a different designation
for all listed securities traded on the Exchange, the Exchange will
notify its order-sending firms of those Exchange-wide changes and
file those changes with the Commission as an interpretation of an
existing rule pursuant to Section 19(b)(3)(A) of the Act and Rule
19b-4(f)(1) thereunder. If, however, the Rules Subcommittee responds
to the fragmentation in the market by identifying different
designated markets for different securities, the Exchange will file,
pursuant to Rule 19b-4(f)(1) under the Act, a new interpretation
confirming that the Rules Subcommittee has identified different
designated markets in different securities for purposes of this
voluntary functionality, but will not list all of those different
designations.
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The Exchange already uses a similar method of defining the scope of
the limit order protections provided for Over-the-Counter (``OTC'')
securities. Under a proposal approved last year, each CHX specialist in
an OTC security has the authority, with the approval of the Exchange,
to identify, on an issue-by-issue basis, the designated market against
which he or she will protect limit orders.\7\ Through this filing, the
Exchange seeks to implement a similar program for determining the scope
of the limit order protections given to listed securities.
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\7\ See Securities Exchange Act Release No. 48014 (June 11,
2003), 68 FR 35923 (June 17, 2003) (SR-CHX-2003-05).
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2. Statutory Basis
The CHX believes the proposal, as amended, 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.\8\ The CHX believes
the proposal, as amended, is consistent with section 6(b)(5) of the Act
\9\ 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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\8\ 15 U.S.C. 78f(b).
\9\ 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 inappropriate 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 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 CHX 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, as amended, is consistent with the Act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549-0609. Comments may also be submitted electronically at the
following e-mail address: rule-comments@sec.gov. All comment letters
should refer to File No. SR-CHX-2003-24. 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, comments should be
sent in hardcopy or by e-mail but not by both methods. 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 will also be available for
inspection and copying at the principal office of the CHX. All
submissions should refer to File No. SR-CHX-2003-24, and should be
submitted by April 14, 2004.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-6595 Filed 3-23-04; 8:45 am]
BILLING CODE 8010-01-P