[Federal Register Volume 60, Number 45 (Wednesday, March 8, 1995)]
[Notices]
[Pages 12796-12798]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-5578]
[[Page 12796]]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35431; File No. SR-CHX-95-04]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval to Proposed Rule Change by Chicago Stock
Exchange, Inc. Relating to an Extension of a Pilot Program for Stopped
Orders in Minimum Variation Markets
March 1, 1995.
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 8, 1995, the Chicago Stock Exchange, Inc. (``CHX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the self-
regulatory organization. The CHX has requested accelerated approval of
the proposal. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1991).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange proposes to extend the pilot program for stopped
orders in minimum variation markets for an additional four (4) month
period. This is the fourth requested extension of the pilot, originally
approved on January 14, 1992.\3\ The first requested extension of the
pilot was approved on March 10, 1993.\4\ The second requested extension
of the pilot was approved on June 11, 1993.\5\ The third requested
extension of the pilot was approved on March 21, 1994.\6\ The pilot
program is set to expire on March 21, 1995. The Exchange has submitted
its current monitoring report under separate cover. The report covers
the period December 20, 1994 through January 20, 1995 and includes
detailed data for January 4, 1995.
\3\See Securities Exchange Act Release No. 30189 (January 14,
1992), 57 FR 2621 (January 22, 1992) (File No. SR-MSE-91-10) (``1992
Approval Order'').
\4\See Securities Exchange Act Release No. 31975 (March 10,
1993), 58 FR 14230 (March 16, 1993) (File No. SR-MSE-93-04) (``March
1993 Approval Order'').
\5\See Securities Exchange Act Release No. 32457 (June 11,
1993), 58 FR 33681 (June 18, 1993) (File No. SR-MSE-93-14) (``June
1993 Approval Order'').
\6\See Securities Exchange Act Release No. 33790 (March 21,
1994), 59 FR 14434 (March 28, 1994) (File No. SR-CHX-93-30) (``1994
Approval Order'').
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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 self-regulatory organization
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 III below. The self-regulatory
organization 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 purpose of the proposed rule change is to extend the pilot
program implemented to establish a procedure regarding the execution of
``stopped'' market orders in minimum variation markets (usually an \1/
8\th spread market). In 1992, the Exchange adopted interpretation and
policy .03 to Rule 37 of Article XX, on a pilot basis, to permit
stopped market orders in minimum variation markets.\7\ Prior to the
pilot program, no Exchange rule required specialists to grant stops in
minimum variation markets if an out-of-range execution would result.
While the Exchange has a policy regarding the execution of stopped
market orders generally, the Exchange believes it is necessary to
establish a separate policy for executing stopped market orders when
there is a minimum variation market.
\7\See 1992 Approval Order, supra, note 3.
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The Exchange's general policy regarding the execution of stopped
orders is to execution them based on the next primary market sale. If
this policy were used in a minimum variation market, it would cause the
anomalous result of requiring the execution of all pre-existing orders,
even if those orders are not otherwise entitled to be filled.\8\
\8\For example, assume the market in ABC stock is 20-20 \1/8\;
50 x 50 with \1/8\th being out of range. A customer places an
order with the Exchange specialist to buy 100 shares of ABC at the
market, and a stop is effected. The order is stopped at 20\1/8\, and
the Exchange specialist includes the order in his or her quote by
bidding the 100 shares at 20. If the next sale on the primary market
is for 100 shares at 20, adopting the Exchange's existing general
policy to minimum variation markets would require the specialist to
execute the stopped market order at 20. However, because the stopped
market order does not have time or price priority, its execution
would trigger the requirement for the Exchange specialist to execute
all pre-existing bids (in this case, 5,000 shares) based on the
Exchange's rules of priority and precedence. This is so even though
the pre-existing bids were not otherwise entitled to be filled.
In the above example, Exchange Rule 37 (Article XX) requires the
Exchange specialist to fill orders at the limit price only if such
orders would have been filled had they been transmitted to the
primary market. Therefore, the 100 share print at 20 in the primary
market would cause at most 100 of the 5,000 share limit order to be
filled on the Exchange. However, the Exchange's general policy
regarding stopped orders, if applied to minimum variation markets,
would require the 100 share stopped market order to be filled, and,
as a result, all pre-existing bids at the same price to be filled in
accordance with Exchange Rule 16 (Article XX).
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The Exchange's proposed policy would prevent unintended results by
continuing a pilot program, established in 1992, for stopped market
orders in minimum variation markets.\9\ Specifically, the pilot program
would require the execution of stopped market orders in minimum
variation markets after a transaction takes place on the primary market
at the stopped price or worse (higher for buy orders and lower for sell
orders), or after the applicable Exchange share volume is exhausted. In
no event would a stopped order be executed at a price inferior to the
stopped price.\10\ In the Exchange's view, the proposed policy would
continue to benefit customers because they might receive a better price
than the stop price, yet it also protects Exchange specialists by
eliminating their exposure to executing potentially large amounts of
pre-existing bids or offers when such executions would otherwise not be
required under Exchange rules.
\9\See 1992 Approval Order, supra, note 3.
\10\Exchange Rule 28 (Article XX) states.
An agreement by a member or member organization to ``stop''
securities at a specified price shall constitute a guarantee of the
purchase or sale by him or it of the securities at the price or its
equivalent in the amount specified. If an order is executed at a
less favorable price than that agreed upon, the member or member
organization which agreed to stop the securities shall be liable for
an adjustment of the differences between the two prices.
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2. Statutory Basis
The Proposed rule change is consistent with Section 6(b) (5) in
that it is designed to promote just and equitable principles of trade.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes that no burdens will be placed on competition
as a result of the proposed rule change.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No comments were received.
[[Page 12797]]
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. 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 at the
Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC 20549. 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-95-04 and should be
submitted by March 29, 1995.
IV. Commission's Findings and Order Granting Accelerated Approval
of Proposed Rule Change
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange and, in
particular, with Section 6(b)(5)\11\ and Section 11(b)\12\ of the Act.
The Commission believes that proposed interpretation and policy .03 to
Rule 37 should further the objectives of Section 6(b)(5) and Section
11(b) through pilot program procedures designed to allow stops, in
minimum variation markets, under limited circumstances that offer
primary market price protection for customers whose orders are granted
stops, while still adhering to traditional auction market rules of
priority and precedence.\13\
\11\15 U.S.C. 78f (1988).
\12\15 U.S.C. 78f (1988).
\13\For a description of CHX procedures for stopping stock in
minimum variation markets, and of the Commission's rationale for
approving those procedures on a pilot basis, see 1992 Approval
Order, supra, note 3. The discussion in the aforementioned order is
incorporated by reference into this order.
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In its orders approving the pilot procedures,\14\ the Commission
asked the CHX to study the effects of stopping stock in a minimum
variation market. Specifically, the Commission requested information on
(1) the percentage of orders which received an out-of-range execution
despite having been stopped; (2) whether limit orders on either side of
the specialist's book were bypassed due to the execution of stopped
orders at a better price (and to this end, the Commission requested
that the CHX conduct a one-day review of all book orders in the five
stocks receiving the greatest number of stops); and (3) specialist
compliance with the pilot program's procedures.
\14\See supra, notes 3-6.
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The Exchange has submitted to the Commission several monitoring
reports regarding its proposed interpretation of Rule 37. The
Commission believes that, although these monitoring reports provide
certain useful information concerning the operation of the pilot
program, the Commission must conduct further analysis of the CHX data
and, in particular, of the rule's impact on limit orders on the
specialist's book before it can consider permanent approval thereof. To
allow the Commission fairly and comprehensively to evaluate the CHX's
use of its pilot procedures, without compromising the benefit that
investors might receive under Rule 37, as amended, the Commission
believes that it is reasonable to extend the pilot program until July
21, 1995.
First, the Exchange's latest monitoring report indicates that
relatively few orders received an out-of-range execution despite having
been stopped and, thus, did not benefit from the CHX proposal.\15\ The
Commission believes that the pilot procedures provide a benefit to
certain investors by offering primary market price protection to
customers whose orders are granted stops in minimum variation markets.
According to the CHX report, moreover, virtually all stopped orders
were for 2,000 shares or less. In this respect, the proposed amendments
should mainly affect small public customer orders, which the Commission
envisioned could most benefit from professional handling by the
specialist.
\15\The Commission notes that this pilot program is intended to
prevent orders from being executed outside the primary market range
for the day (i.e., from establishing a new high or new low).
Consistent with that policy, the CHX requires the specialist to
execute stopped stock based on the next primary market sale.
Specifically, if the next sale is at a better price, the stopped
stock may, depending on the depth of the specialist's limit order
book at that price, receive price improvement. However, if the next
primary market sale is at the stop price (or worse), the order can
receive the stop price. If an order is executed at the stop price
because the next sale creates a new primary market range, the pilot
program may still have provided a benefit to investors, by
preventing what would have been an out-of-range execution.
Conversely, an order may not benefit from the CHX proposal if,
despite having been stopped, it ultimately receives an out-of-range
execution. In a minimum variation market, this can occur if, by the
close, (1) the primary market has not traded at the stop price and
(2) all pre-existing limit orders on the CHX specialist's book at
the better price have not been executed.
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Second, the CHX does not appear to believe that its proposed policy
significantly disadvantages customer limit orders existing on the
specialist's book.\16\ This conclusion is based on the Exchange's
analysis of limit orders on the opposite side of the market at the time
a stop was granted pursuant to the pilot program. As part of its
analysis (which included a one-day review of the five stocks receiving
the greatest number of stops), the CHX determined how often book orders
which might have been entitled to an execution had the order not been
stopped, in fact, were executed at their limit price by the close of
the day's trading. In addition to aggregated data, the Exchange
provided a detailed breakdown of the disposition of each order.
\16\When stock is stopped, book orders on the opposite side of
the market that are entitled to immediate execution lose their
priority. If the stopped order then receives an improved price,
limit orders at the stop price are bypassed and, if the market turns
away from that limit, may never be executed.
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The Commission historically has been concerned that book orders may
be bypassed when stock is stopped, especially in a minimum variation
market.\17\ Based on the CHX's prior experience, the Commission did not
have sufficient grounds to conclude that this long-standing concern had
been alleviated. The Commission acknowledges, however, that the CHX's
latest monitoring reports provide new information on this aspect of the
pilot program. As a result, the Commission finds that additional time
is necessary for the Commission to review such information and to
ensure that Rule 37, as amended, does not harm public customers with
limit orders on the specialist's book.
\17\See, e.g., SEC, Report of the Special Study of the
Securities Markets of the Securities and Exchange Commission, H.R.
Doc. No. 95, 88th Cong., 1st Sess. Pt. 2 (1963). Commission, H.R.
Doc. No. 95, 88th Cong., 1st Sess. Pt. 2 (1963).
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As for book orders on the same side of the market as the stopped
stock, the Commission believes that the proposed requirements make it
unlikely that these limit orders would be bypassed. Under the
Exchange's pilot procedures, a stopped order can receive price
improvement only if all preexisting CHX share volume at that price has
been exhausted.
As for the pilot program's effect on limit orders on the same side
of the market as the stopped stock, the CHX report suggests that a
substantial majority of limit orders at the bid (for
[[Page 12798]] stopped buy orders) or offer (for stopped sell orders)
with time priority were executed by the close. The Commission
recognizes the unintended consequences that can arise from the
interplay between a regional exchange's price protection rules and its
procedures for stopping stock.\18\ In the Commission's opinion, the CHX
data suggests that stopped stock generally has been executed in
accordance with traditional auction market principles.
\18\See supra, note 8 and accompanying text.
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Finally, the CHX has responded to the Commission's questions about
compliance with the pilot program procedures; at this time, the
Exchange staff is not aware of any market surveillance investigations
or customer complaints relating to the practice of stopping stock in
minimum variation markets.\19\ In the event, however, that the CHX
identifies any instances of specialist noncompliance with the pilot
procedures, the Commission would expect the Exchange to take
appropriate action in response.
\19\Telephone conversation between David T. Rusoff, Foley &
Lardner, and Beth A. Stekler, Attorney, Division of Market
Regulation, SEC, on February 28, 1995.
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During the pilot extension, the Commission requests that the
Exchange continue to monitor the effects of stopping stock in a minimum
variation market and to provide additional information where
appropriate. In addition, if the Exchange determines to request
permanent approval of the pilot program or an extension thereof beyond
July 21, 1995, the CHX should submit to the Commission a proposed rule
change by April 15, 1995.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of the
notice of filing thereof. This will permit the pilot program to
continue on an uninterrupted basis. In addition, the procedures the
Exchange proposes to continue using are the identical procedures that
were published in the Federal Register for the full comment period and
were approved by the Commission.\20\
\20\No comments were received in connection with the proposed
rule change which implemented these procedures. See 1992 Approval
Order, supra, note 4.
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It is therefore ordered, pursuant to Section 19(b)(2)\21\ that the
proposed rule change (SR-CHX-95-04) is hereby approved on a pilot basis
until July 21, 1995.
\21\15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\22\
\22\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-5578 Filed 3-7-95; 8:45 am]
BILLING CODE 8010-01-M
