[Federal Register Volume 63, Number 205 (Friday, October 23, 1998)]
[Notices]
[Pages 56956-56957]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28199]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40545; File No. SR-CHX-98-25]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Stock Exchange, Inc. Relating to the Addition of
an Interpretation to the Minimum Variation Rule
October 13, 1998.
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 September 29, 1998,\3\ the Chicago Stock Exchange, Inc. (``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 CHX. 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\ Amendment No. 1 was filed on October 13, 1998, the substance
of which is incorporated into this notice. Letter from Patricia L.
Levy, General Counsel, CHX, to Katherine A. England, Assistant
Director, Division of Market Regulation, Commission, dated October
9, 1998.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
CHX is proposing to add Interpretation and Policy .06 to Article
XX, Rule 22 relating to the trading by members in increments smaller
than the minimum variation in order to match bids and offers displayed
in other markets for the purpose of preventing Intermarket Trading
System (``ITS'') trade-throughs. Proposed new language is in italics.
Article XX--Minimum Variation
Rule 22 No text change.
* * * Interpretations and Policies
.01 through .05 No text change.
.06 Notwithstanding the foregoing and any other rule regarding
adherence to the minimum variation, a member may execute orders on the
Floor in increments smaller than the minimum variation in order to
match bids and offers displayed by other markets for the purpose of
preventing Intermarket Trading System trade-throughs, provided,
however, a limit order executed on the Exchange must continue to be
priced at an increment no less than the current minimum variation for
such security, and specialists must continue to reflect their principal
bids and offers in such increments.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, CHX 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. CHX has prepared summaries, set forth in Sections A, B,
and C below, of the most significant aspects of such statements.
III. Self-Regulatory Organization's Statement of the Purpose of,
and Statutory Basis for, the Proposed Rule Change
1. Purpose
Over the past 18 months, a number of self regulatory organizations
(``SROs''), including the Exchange, the Pacific Exchange, Inc.
(``PCX''), the American Stock Exchange (``Amex''), the Nasdaq Stock
Market (``Nasdaq''), the New York Stock Exchange (``NYSE'') and the
Chicago Board Options Exchange (``CBOE''), have reduced the minimum
trading and quotation increments of most equity securities to as little
as 1/16 of one dollar.\4\ Subsequent to the reduction to sixteenths,
several third market makers have commenced quoting securities in
increments smaller than those approved for trading on the exchanges on
which the securities are listed or traded.\5\ Several exchanges have
responded by permitting their members to execute trades in these finer
[[Page 56957]]
increments under certain circumstances.\6\ Like these other exchanges,
the CHX believes that it is important to provide its members with
flexibility to effect transactions on the Exchange at a smaller
increment than is set forth in its existing interpretations and
policies. (i.e., 1/16 for most securities) for the purpose of matching
a displayed bid or offer in another market at such smaller increment
(i.e., 1/32, 1/64 or smaller) for the purpose of preventing ITS trade-
throughs. For example, if the best bid on the Exchange is 8 and a bid
of 81/32 is displayed through ITS in another market center, the
Exchange specialist or floor broker may execute a market or marketable
limit order at 81/32 in order to match the other market's bid. Limit
orders entered on the Exchange, however, will continue to be priced at
the current minimum trading increments (i.e., usually 1/16), and orders
priced in smaller increments will not be accepted. In addition,
specialists will not be permitted to quote in these finer increments.
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\4\ See Exchange Act Release Nos. 38780 (June 26, 1997), 62 FR
36087 (July 3, 1997) (approving a PCX rule change to reduce the
minimum quotation increment to 1/16 for stocks); 38571 (May 5,
1997), 62 FR 25682 (May 9, 1997) (approving an Amex proposal to
reduce the minimum trading increment to 1/16 for certain Amex-listed
equity securities); 38678 (May 27, 1997), 62 FR 30363 (June 6, 1997)
(approving a Nasdaq rule change to reduce the minimum quotation
increment to 1/16 for certain Nasdaq-listed securities); 38897
(August 1, 1997), 62 FR 42827 (August 8, 1997) (approving a NYSE
rule change to reduce the minimum quotation increment to 1/16 for
certain NYSE-listed securities); and 39159 (September 30, 1997), 62
FR 52365 (October 9, 1997) (approving a CBOE rule change to reduce
the minimum quotation increment to 1/16 for stocks).
\5\ For example, Nasdaq systems are capable of trading
securities priced under $10 in increments as fine as 1/32 of one
dollar. Securities priced over $10 may be traded in increments as
fine as 1/16 of one dollar. As a result, the Nasdaq third market
makers may trade Amex listed securities that are traded on CHX and
priced at less than $10 in increments finer than sixteenths.
\6\ See Exchange Act Release Nos. 40199 (July 14, 1998), 63 FR
39336 (July 22, 1998) (approving PCX rule permitting members to
trade in increments smaller than 1/16, in order to match bids and
offers displayed in other markets for the purpose of preventing ITS
trade-throughs); 40189 (July 10, 1998), 63 FR 38439 (July 16, 1998)
(approving Amex rule permitting members to trade in increments
smaller than 1/16, in order to match bids and offers displayed in
other markets for the purpose of preventing ITS trade-throughs).
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The proposed amendment will allow CHX traders to match prices
disseminated by market makers that may better the CHX quote by an
increment finer than the current minimum increment (usually 1/16).
Further, the proposal will enable the Exchange to match prices
disseminated by another exchange in the event that another exchange
were to reduce its minimum trading increment. Thus, the proposed
amendment will assist Exchange members in fulfilling their obligation
to obtain the best price for their customers.
While the new interpretation would give members the extra
flexibility that they need, the Exchange believes that a member would
violate the spirit and intent of this new interpretation and would,
most likely, be considered to have engaged in manipulative activity, in
the event that the member enters an order in another market in a
smaller variation for the express purpose of enabling such member to
execute trades on the Exchange at such small increment. For example, if
floor broker sent to a third market maker a 100 share limit order to
buy that is priced 1/32 or 1/64 better than the current quote solely to
enable the floor broker to cross a large block of stock on the Exchange
at such better price without a specialist intervention, the Exchange
would probably consider the floor broker to have engaged in
manipulative activity.\7\
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\7\ The Exchange believes this is consistent with a recent SEC
enforcement action brought against two brothers who used the SEC's
Limit Order Display Rule to manipulative the quote to their
advantage. See In re Ian Fishman and Lawrence Fishman, Admin. Proc.
File No. 3-9629 (June 24, 1998). In that case, the Commission stated
that the brothers used a limit order ``to move the public bid or
offer quote, in order to permit [Fishman] to buy or sell a security
at a price that otherwise would not have been available in the
market,'' and found that such activity violated Exchange Act Rule
10b-5.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b)(5) of the Act \8\ in that it is designed to promote
just and equitable principles of trade, to remove impediments to 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)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
CHX 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
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the 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 self-regulatory organization consents, the Commission will:
(A) by order approve the 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 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, N.W., Washington, D.C. 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 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-98-25 and should be
submitted by November 13, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-28199 Filed 10-22-98; 8:45 am]
BILLING CODE 8010-01-M
