01-537. Self-Regulatory Organizations; The Chicago Stock Exchange, Inc.; Order Granting Approval to Proposed Rule Change Relating to Automatic Execution of Agency Limit Orders for Dual Trading System Issues

January 2, 2001.

I. Introduction

On September 14, 2000, the Chicago Stock Exchange, Inc. (“CHX” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) ^[1] and Rule 19b-4 thereunder,^[2] a proposed rule change relating to automatic execution of agency limit orders for dual trading system issues. The proposed rule change was published for comment in the Federal Register on November 16, 2000.^[3] The Commission received no comments on the proposal. This order approves the proposed rule change.

II. Description of the Proposal

The Exchange proposes to amend CHX Rule 37(b)(6) under Article XX relating to the automatic execution of agency limit orders for dual trading system issues in the event of a trade-through. Under the proposal, a specialist would be allowed to elect, on an issue-by-issue basis, to either manually or automatically execute limit orders when a trade-through occurs in the primary market. The current rule provides that agency limit orders (that are not marketable when entered into the Exchange's MAX automatic execution system) will automatically be filled at the limit price when there is a price penetration of the limit price in the primary market for the subject security or securities. Under the proposal, automatic execution of such limit orders will no longer be required. A CHX specialist may elect to provide for automatic execution of agency limit orders at the limit price when there is a price penetration of the limit price in the primary market for the subject security or securities. The obligation to fill the order at the limit price remains the same, whether executed manually or automatically. The Exchange believes that the proposed amendment reasonably anticipates the impact that the decimal pricing environment will have on the national market system, where the number of small orders executed at multiple price levels may increase the number of inadvertent trade-throughs that could otherwise lead to unwarranted automatic executions of large orders in a CHX specialist's limit order book, exposing the specialist to increased liability in a decimal pricing environment.

III. Discussion

The Commission has reviewed carefully the CHX's proposed rule change and finds, for the reasons set forth below, that the proposal is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange,^[4] and with the requirements of Section 6(b).^[5] In particular, the Commission finds the proposal is consistent with Section 6(b)(5) ^[6] 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. The Commission believes the proposal is reasonably designed to guard against the possible situation where the number of small orders executed on the Exchange at multiple price levels increases the number of inadvertent trade-throughs that could otherwise lead to unwarranted automatic executions of large orders in a specialist's limit order book, resulting in increased liability to CHX specialists. The Commission believes the proposal is designed to provide a safeguard as the national market system converts to a decimal pricing environment, and should result in grater stability during the transition. Furthermore, the Commission finds that the proposal is consistent with the section 6(b)(5) requirement that the Exchange's rules be designed to promote just and equitable principles of trade, because the obligation to fill orders at the limit price remains constant, regardless of whether executions are manual or automatic.

IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,^[7] that the proposed rule change (SR-CHX-00-28), is approved.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[8]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  See Securities Exchange Act Release No. 43530 (November 7, 2000), 65 FR 69355.

4.  In approving this rule, the Commission has considered its impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

5.  15 U.S.C. 78f(b).

6.  15 U.S.C. 78f(b)(5).

7.  15 U.S.C. 78s(b)(2).

8.  17 CFR 200.30-3(a)(12).