[Federal Register Volume 59, Number 59 (Monday, March 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-7164]
[Federal Register: March 28, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33790; File No. SR-CHX-93-30]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Temporary 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 21, 1994.
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 November 9, 1993, 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. On March 16, 1994, the Exchange submitted
Amendment No. 1 to the proposed rule change to make certain technical
corrections to the text of the original filing.\3\ 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.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1991).
\3\See letter from David T. Rusoff, Foley & Lardner, to Sandra
Sciole, Special Counsel, Division of Market Regulation, SEC, dated
March 15, 1994 (``Amendment No. 1'').
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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 one (1) year
period. The pilot program is currently set forth in interpretation and
policy .03 to Rule 37 of Article XX of the CHX rules. This is the third
requested extension of the pilot, originally approved on January 14,
1992.\4\ The first requested extension of the pilot was approved on
March 10, 1993.\5\ The second requested extension of the pilot was
approved on June 11, 1993.\6\ The pilot program is set to expire on
March 21, 1994.
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\4\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'').
\5\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'').
\6\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'').
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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 ordes when
there is a minimum variation market.
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\7\See 1992 Approval Order, supra, note 4.
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The Exchange's general policy regarding the execution of stopped
orders is to execute 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\
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\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.
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\9\See 1992 Approval Order, supra, note 4.
\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.
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-93-30 and should be
submitted by April 18, 1994.
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\
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\11\ 15 U.S.C. 78f (1998).
\12\ 15 U.S.C. 78k (1998).
\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 4. 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 stopped orders executed at the stop price, versus
the percentage of such orders receiving a better price; (2) whether
limit orders on either side of the specialist's book were being
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.
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\14\See supra, notes 4-6.
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On March 2, 1993, June 1, 1993, and December 6, 1993, the Exchange
submitted to the Commission 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 CHX must provide further data
before the Commission can fairly and comprehensively evaluate the CHX's
use of the pilot procedures. To allow such additional information to be
gathered and reviewed, the Commission believes that it is reasonable to
extend the pilot program until March 21, 1995. During this extension,
the Commission expects the CHX to respond fully to the concerns set
forth below.
First, the December monitoring report indicates that less than half
of orders stopped in minimum variation markets received price
improvement. However, given that the CHX's prior results were
substantially higher, the Commission believes that further study is
necessary. The Commission also notes that, under the Exchange's
procedures, whether a stopped order receives price improvement depends
largely on price movements in the primary market,\15\ and not on the
effectiveness of the pilot program itself. Thus during the pilot
extension, the Commission requests that the Exchange instead calculate
the percentage of stopped orders that do not benefit from the CHX
proposal (i.e., orders which receive an out-of-range execution despite
having been stopped).\16\ In addition, the CHX should continue to
monitor the percentage of stopped orders which are for 2,000 shares or
less.
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\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
receives the stop price. In the Commission's opinion, 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.
\16\The Commission notes that, in a minimum variation market, a
stopped order could ultimately receive an out-of-range execution 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.\17\ This conclusion is based on the Exchange's
review 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 review,
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. Although the
results of that review suggest a few limit orders, potentially, may
have been disadvantaged, that data is not conclusive give the
relatively small sample of orders used to analyze the pilot program's
impact.
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\17\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.
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.
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The Commission historically has been concerned that book orders may
get bypassed when stock is stopped, especially in a minimum variation
market.\18\ Based on the CHX's experience to date, the Commission
believe that additional data is necessary before the Commission can
determine whether there are sufficient grounds to conclude that this
long-standing concern has been alleviated. Thus to ensure that Rule 37,
as amended, does not result in potential harm to public customers with
limit orders on the specialist's book, the CHX should provide detailed
facts supporting its arguments about the impact of its pilot
procedures. The Commission therefore requests that the CHX conduct a
more thorough review of this issue. At a minimum, the CHX should
determine how often limit orders against which stock is stopped in a
minimum variation market are executed by the close of the day's
trading.\19\ Further, the CHX should conduct, on a date to be selected
by the Commission, another one-day review of all book orders in the
five stocks receiving the greatest number of stops, and should submit
to the Commission both raw trade data for,\20\ and a description of the
final disposition of,\21\ each such order.
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\18\See, e.q., 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).
\19\As before, the CHX would first identify all limit orders
against which stock is stopped in minimum variation markets. The CHX
could then determine how many of those orders actually are executed
by the close of the day's trading. In the alternative, the CHX could
make the same determination on an aggregate share basis.
\20\In this regard, the Commission requests that the CHX submit
the documentation the CHX is relying upon to support its conclusions
about the final disposition of these limit orders. See Infra, note
21.
\21\See supra, note 19.
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In terms of 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 stopped buy
orders) or offer (for stopped sell orders) with time priority were
executed by the close. During the pilot extension, the Commission
requests that the CHX gather and report information on (1) the average
number of limit orders and average number of shares on the book ahead
of the stopped stock and (2) how much of that pre-existing volume
typically is executed by the close. Moreover, the CHX should determine
how often, as percentage of total stops granted, the pre-existing
volume is executed in its entirety.
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.\22\ During the pilot extension, the
Commission requests that the CHX continue to monitor closely specialist
compliance with Rule 37's procedures. As before, the CHX report should
describe each instance of specialist non-compliance with these
procedures and any action taken by the Exchange in response thereto.
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\22\Telephone conversation between David T. Rusoff, Foley &
Lardner, and Beth A. Stekler, Attorney, Division of Market
Regulation, SEC, on March 17, 1994.
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The Commission requests that the CHX submit a report describing its
findings on these matters by December 31, 1994. In addition, if the
Exchange determines to request an extension of the pilot program beyond
March 21, 1995, the Commission requests that the CHX also submit a
proposed rule change by December 31, 1994.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day 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.\23\
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\23\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)\24\ that the
proposed rule change (SR-CHX-93-30) is hereby approved.
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\24\15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\25\
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\25\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-7164 Filed 3-25-94; 8:45 am]
BILLING CODE 8010-01-M
