[Federal Register: December 30, 2002 (Volume 67, Number 250)]
[Notices]
[Page 79671-79673]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30de02-126]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47068; File No. SR-CHX-2002-37]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the Chicago Stock Exchange,
Incorporated Relating to Execution of Limit Orders Following Primary
Market Block-Size Trade-Through
December 20, 2002
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on December 11, 2002, the Chicago Stock Exchange, Incorporated
(``CHX'' or ``Exchange'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I, II and III below, which Items have been prepared by the
Exchange. The Exchange filed the proposal pursuant to Section
19(b)(3)(A) of the Act,\3\ and Rule 19b-4(f)(6) \4\ thereunder,
[[Page 79672]]
which renders the proposal effective upon filing with the Commission.
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.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6).
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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 certain provisions of CHX Article
XX, Rule 37(a)(3), which governs, among other things, execution of
limit orders in a CHX specialist's book following a trade-through in
the primary market. Specifically, the CHX seeks to add a provision that
would permit, but not require, a CHX specialist to enable a
functionality that would automatically execute designated limit orders
represented in the specialist's quotation, following a ``block size''
\5\ trade-through in the primary market, at the block price instead of
the limit price. The text of the proposed rule change is available at
the Commission and at the CHX.
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\5\ A ``block size trade'' means a trade that involves 10,000 or
more shares of a Dual Trading System (i.e., listed) issue, or having
a market value of $200,000 or more.
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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 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 Change
1. Purpose
The proposed rule change would permit a CHX specialist to enable a
functionality that would automatically execute designated limit orders
represented in the specialist's quotation, following a ``block size''
trade-through in the primary market, at the block price instead of the
limit price.
Under existing Exchange rules relating to listed securities,
whenever a block trade in the primary market trades through a
specialist's quote, the specialist must execute all limit orders in the
book (that are priced at the block price or better) at the better block
price, rather than at their less-favorable limit prices.\6\ This
requirement protects resting customer limit orders against large trade-
throughs in the primary market.
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\6\ See CHX Article XX, Rule 7.06.
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At the time a trade-through occurs, however, it is impossible to
determine whether it qualifies as a ``block trade.''\7\ For that
reason, the Exchange's systems have been designed to automatically
execute resting customer limit orders at their limit prices; CHX
specialists must later correct those prices to the better block price,
if they have determined that a block trade occurred.
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\7\ A block trade is a trade that involves (a) a trade of
``block size'' (10,000 shares or more, or with a market value of
$200,000 or more); and (b) either (i) a cross of block size (where a
single firm represents all of one side of the transaction and all or
a portion of the other side) or (ii) any other transaction where a
single firm represents an order of block size on only one side of
the transaction, so long as the transaction does not occur at the
Exchange's current bid or offer. At the time a transaction occurs on
another market, the CHX can determine whether it is a block size
trade; the CHX does not yet know, however, which firms were on which
sides of the transaction and therefore cannot determine whether it
meets the other requirements of a block trade.
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This practice of correcting execution prices, even when it results
in a better execution for the customer, is a large inconvenience to
some key CHX order-sending firms. These electronically sophisticated
firms must send out two trade confirmations to each customer--one that
is generated as soon as the trade occurs and a second to reflect the
corrected execution price.
To accommodate CHX order-sending firms, the proposed rule change
would permit, but not require, a CHX specialist to enable a
functionality that would automatically execute designated limit orders
when a block-size trade-through occurs in the primary market at the
block price. We anticipate that the use of this functionality will
result in a dramatic reduction of price corrections and, thus, will
provide better customer service to some of the Exchange's key order-
sending firms.
In addition to adding the optional functionality detailed above,
the proposed rule change would relocate the existing provision
currently located in Article XX, Rule 7.06 to Article XX, Rule 37(a)(3)
of the CHX Rules, which governs execution of limit orders in a CHX
specialist's book when certain conditions occur in the primary market.
It is important to note that the proposed rule change does not seek to
modify a CHX specialist's execution obligations whatsoever. Rather, it
represents the Exchange's attempt to address the concerns of its order-
sending firms by providing CHX specialists with a functionality that
they can utilize to meet their obligations automatically, instead of by
means of the manual price correction procedure currently used.
Moreover, the proposed functionality would only permit a CHX specialist
to designate an order for automatic execution based on objective
criteria such as the size of the order. For this reason, as set forth
below, the Exchange believes that immediate effectiveness of the rule
change is amply warranted.
The Exchange intends to allow its specialists to begin using this
new functionality floor-wide on January 2, 2003; a pilot version of the
functionality likely will be tested in a limited number of issues
beginning the week of December 16, 2002.
2. Statutory Basis
The CHX 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).\8\ The CHX believes the proposal 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. 78(f)(b).
\9\ 15 U.S.C. 78f(b)(5).
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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 inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments Regarding the
Proposed Rule Change Received From Members, Participants or Others
Written comments were neither solicited nor 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 \10\ and Rule 19b-4(f)(6)\11\ 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
[[Page 79673]]
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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\10\ 15 U.S.C. 78s(b)(3)(A).
\11\ 17 CFR 240.19b-4(f)(6).
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The Exchange has requested that the Commission accelerate the
operative date. The Commission believes waiving the 30-day operative
delay is consistent with the protection of investors and the public
interest.\12\ The Commission believes that acceleration of the
operative date will allow the Exchange to implement this new automatic
functionality floor-wide on January 2, 2002 and to permit a pilot
version of the functionality to be tested beginning the week of
December 16, 2002. For these reasons, the Commission designates this
proposal as both effective and operative upon filing with the
Commission.
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\12\ 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 proposal 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. 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-2002-37 and should be
submitted by January 21, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-32916 Filed 12-27-02; 8:45 am]
BILLING CODE 8010-01-P