[Federal Register Volume 63, Number 242 (Thursday, December 17, 1998)]
[Notices]
[Pages 69699-69701]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33360]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40763; File No. SR-CHX-98-25]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change Relating to the
Addition of an Interpretation to the Minimum Variation Rule
December 8, 1998.
I. Introduction
On September 25, 1998, the Chicago Stock Exchange, Inc. (``CHX'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act
[[Page 69700]]
of 1934 (``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\
a proposed rule change to add an interpretation to the Minimum
Variation Rule.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in the Federal
Register on October 23, 1998.\3\ No comments were received on the
proposal. This order approves the proposal, as amended.\4\
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\3\ See Exchange Act Release No. 40545 (October 13, 1998), 63 FR
56956 (October 23, 1998).
\4\ Amendment No. 2 makes a technical word change to the
proposed rule change, replacing the word ``that'' with ``than'' in
the second line of the proposed Interpretation and Policy .06 to
Art. XX, Rule 22. Since this amendment is completely technical in
nature, good cause for accelerated approval is not necessary. Letter
from Kirsten M. Carlson, Counsel to the CHX, to Katherine A.
England, Assistant Director, Division of Market Regulation,
Commission, dated October 14, 1998.
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II. Description of the Proposal
The CHX proposes 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.
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.\5\ 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.\6\ Several exchanges have
responded by permitting their members to execute trades in these finer
increments under certain circumstances.\7\ 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 8\1/32\ is displayed through ITS in another market center, the
Exchange specialist or floor broker may execute a market or marketable
limit order at 8\1/32\ 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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\5\ 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 42847 (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).
\6\ 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 third market makers
may trade Amex listed securities that are traded on CHX and priced
at less than $10 in increments finer than sixteenths.
\7\ 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); and 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 smaller 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.\8\
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\8\ 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 manipulate 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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III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act \9\ and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, with the requirements of Section 6(b) of the Act.\10\
Specifically, the Commission believes the proposal is consistent with
Section 6(b)(5) in that it is designed to promote just and equitable
principles of trade, to prevent fraudulent and manipulative acts, and,
in general, to protect investors and the public interest.\11\
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\9\ In reviewing this proposal, the Commission has considered
the proposal's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
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Recently, there has been a movement within the industry to reduce
the minimum trading and quotation increments imposed by the various
SROs. Last year, Amex, Nasdaq, NYSE, PCX and CBOE reduced their minimum
increments.\12\ Currently, exchange rules provide for trading of most
equity securities in increments as small as \1/16\ of a dollar. The CHX
exchange represents that several third market makers have begun quoting
securities in increments smaller than those approved for trading on the
primary markets. The Exchange's proposed rule change will provide it
the limited flexibility it needs to address this development and remain
competitive with these third markets.
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\12\ See supra, note 5.
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The size of the minimum trading increment for securities traded
through the facilities of the Nasdaq system is determined by the
technical limitations of the Nasdaq system. Currently, Nasdaq systems
are capable of trading securities priced under $10 in increments as
fine
[[Page 69701]]
as \1/32\ of one dollar. Securities priced over $10 may be traded in
increments as fine as \1/16\ of one dollar.\13\ As a result, the
Commission recognizes that third market makers may trade exchange
listed securities priced at less than $10 in increments finer than
sixteenths. Nasdaq has informed the Commission that third market makers
are currently posting quotes for listed securities in increments finer
than sixteenths.\14\ The proposed amendment to CHX Article XX, Rule 22,
will allow CHX traders to match price disseminated by third market
makers that may better the CHX quote by an increment finer than the \1/
16\ minimum increment. In addition, the Commission notes that the
proposal will enable the Exchange to match prices disseminated by other
exchanges in the event that another exchange were to reduce its minimum
trading increment.\15\ The proposal should assist Exchange members to
fulfill their obligation to obtain the best price for their customers.
Accordingly, the Commission finds that it is reasonable for the CHX to
allow trading in increments finer than \1/16\ for the limited purpose
of preventing an ITS trade-through.
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\13\ The Commission notes that any change to the minimum
increment for securities traded through the facilities of the Nasdaq
system would be considered a change in an existing order-entry or
trading system of an SRO. Accordingly, the Nasdaq would be required
to file a proposed rule change under Section 19(b)(3)(A) of the Act
to change its minimum increment.
\14\ See Exchange Act Release No. 40189 (July 10, 1998), 63 FR
38439 (July 16, 1998).
\15\ To change its minimum increment, an exchange would be
required to file a proposed rule change that would become
immediately effective under Section 19(b)(3)(A).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\16\ that the proposed rule change (SR-CHX-98-25), as amended, is
approved.
\16\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-33360 Filed 12-16-98; 8:45 am]
BILLING CODE 8010-01-M
