[Federal Register Volume 62, Number 43 (Wednesday, March 5, 1997)]
[Notices]
[Pages 10102-10104]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5369]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38338; File No. SR-CHX-97-02]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Chicago
Stock Exchange, Incorporated Relating to Enhanced SuperMAX
February 26, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on January 30, 1997, the
Chicago Stock Exchange, Incorporated (``CHX'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the self-regulatory organization. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons and to grant accelerated approval to the
proposal.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange requests permanent approval of its Enhanced SuperMAX
pilot program, as amended, located in subsection (e) of Rule 37 of
Article XX.
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 IV below. The self-regulatory
organizations 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
On May 22, 1995, the Commission approved a proposed rule change of
the CHX that allows specialists on the Exchange, through the Exchange's
MAX system, to provide order execution guarantees that are more
favorable than those required under CHX Rule 37(a), Article XX.\2\ That
approval order contemplated that the CHX would file with the Commission
specific modifications to the parameters of MAX that are required to
implement various options available under this new rule.
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\2\ See Securities Exchange Act Release No. 35753 (May 22,
1995), 60 FR 28007.
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On July 27, 1995, the Commission approved a proposed rule change of
the CHX that implemented two options available under this new rule.\3\
These two new options, Enhanced SuperMAX and Timed Enhanced SuperMAX,
we approved on a pilot basis until July 31, 1996. The Commission
extended the pilot program until December 31, 1996 and requested that
the CHX provide a report to the Commission, by August 31, 1996,\4\
describing its experience with the pilot program. On August 30, 1996,
the CHX submitted the report. Most recently, the Commission extended
the pilot program until March 1, 1997.\5\ In connection with the
extension, the CHX agreed to provide additional data to the Commission
regarding the pilot. On January 31, 1997, the Exchange submitted this
data.
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\3\ See Securities Exchange Act Release No. 36027 (July 27,
1995), 60 FR 39465.
\4\ See Securities Exchange Act Release No. 37491 (July 29,
1996), 61 FR 48690.
\5\ See Securities Exchange Act Release No. 38098 (December 30,
1996), 62 FR 1008. Commission note: The CHX Form 19b-4 filing
indicates incorrectly that the pilot program was extended until
March 31, 1997.
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The purpose of the proposed rule change is to request permanent
approval of the pilot program, as amended by this filing. Specifically,
the Exchange is combining the two options currently available under the
pilot program into one option, to be called Enhanced SuperMAX. Enhanced
SuperMAX was merely a reactivation of the Exchange's Enhanced SuperMAX
program, a program originally approved by the Commission on a pilot
basis in 1991.\6\ The proposed Enhanced SuperMAX program differs from
the original pilot program approved in 1991 in that it is available
starting at 8:45 a.m. instead of 9:00 a.m. This program also differs
from the Exchange's SuperMAX program in that under this program,
certain orders are ``stopped'' at the consolidated best bid or offer
and are executed with reference to the next primary market sale instead
of the previous primary market sale.
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\6\ See Securities Exchange Act Release No. 30058 (December 10,
1991), 56 FR 65765.
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The Enhanced SuperMAX program, as amended by this filing, also
includes all of the features of the pilot version of the Timed Enhanced
SuperMAX program. Essentially, the new Enhanced SuperMAX program will
execute orders in the same manner as the pilot Enhanced SuperMAX
program, except that if there are no executions in the primary market
after the order has been stopped for a designated time period, the
order is executed at the stopped price at the end of such period. Such
period, known as a time out period, is pre-selected by a specialist on
a stock-by-stock basis based on the size of the order, may be changed
by a specialist no more frequently than once a month, and may be no
less than 30 seconds.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b)(5) of the
Act 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.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose a burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No comments were solicited or received.
III. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission has carefully reviewed the Exchange's proposed rule
change and, for the reasons set forth below, finds that the proposed
rule change, as amended by this filing, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to the Exchange, and, in particular, with Section 6(b)(5)\7\
of the Act 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
[[Page 10103]]
open market and a national market system, and, in general, to protect
investors and the public interest.
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\7\ 15 U.S.C. 78f(b)(5).
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The proposed rule change provides for a modified version of the
SuperMAX system. SuperMAX is a system that automatically improves
executions of small agency market orders from the consolidated best bid
or offer according to certain predefined criteria, including the last
sale in the primary market. In 1990, the Commission first approved
SuperMAX on a pilot basis.\8\ In 1991, the Commission approved Enhanced
SuperMAX on a pilot basis to run concurrently with SuperMAX, which was
still on a pilot at that time.\9\ This program differed from the
Exchange's SuperMAX program in that under this program, certain orders
are ``stopped'' at the consolidated best bid or offer and are executed
with reference to the next primary market sale instead of the previous
primary market sale. The Exchange sought approval of the Enhanced
SuperMAX and SuperMAX systems to evaluate both systems and to determine
which system it wanted to implement.
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\8\ See Securities Exchange Act Release No. 28014 (May 14,
1990), 55 FR 20880.
\9\ Supra note 6.
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In 1993, the Exchange chose to implement SuperMAX rather than
Enhanced SuperMAX and sought approval of SuperMAX on a permanent basis.
The Commission permanently approved SuperMAX, believing that the
automated execution feature of SuperMAX would provide a more efficient
means of bettering the execution price on a large volume of
electronically delivered market orders than through manual
processing.\10\ The Enhanced SuperMAX pilot expired in 1993 without the
Exchange requesting an extension or permanent approval. In the initial
Enhanced SuperMAX pilot approval order, the Commission had described
its concerns with the program and requested that the Exchange submit a
report detailing the use of the pilot. The Exchange, however, did not
submit a report because specialists on the Exchange made little or no
use of the pilot program.\11\ Since the Exchange revived the Enhanced
SuperMAX pilot program in 1995 (and at the same time requested the
Commission approve a pilot of Timed Enhanced SuperMAX), according to
reports submitted by the Exchange, no orders have been executed in the
Enhanced SuperMAX program because no specialist has chosen this
option.\12\ According to the Exchange, there are two reasons for the
lack of use of this option. First, there has been no interest in this
option from customers. Second, competitors (especially third market
firms) now give executions with a time-out feature that is akin to
Timed Enhanced SuperMAX. As a result, the Exchange states, customers
have come to expect, and now desire, an execution after a designated
time period.\13\
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\10\ Securities Exchange Act Release No. 32631 (July 14, 1993),
58 FR 30969 (order approving SuperMAX permanently).
\11\ Id.
\12\ Report of the Chicago Stock Exchange Relating to the
Enhanced SuperMAX and Timed Enhanced SuperMAX Pilot Programs (August
30, 1996) at 1 (``First Report'') (covering the three month period
ending August 27, 1996); Second Report of the Chicago Stock Exchange
Relating to the Enhanced SuperMAX and Timed Enhanced SuperMAX Pilot
Programs (January 30, 1997) at 1 (``Second Report'') (covering the
three month period ending January 20, 1997).
\13\ First Report, supra note 12 at 1; Second Report, supra note
12 at 1.
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The Exchange has revised the rule to combine Enhanced SuperMAX and
Timed Enhanced SuperMAX into one option, Enhanced SuperMAX, as amended,
which preserves the option of the Enhanced SuperMAX in its pilot form
while recognizing that customers have almost exclusively chosen the
Timed Enhanced SuperMAX option. As a result, if a specialist has
selected a time-out period, and there is a sale during the time-out
period, the execution price is the same as it would have been under
Enhanced SuperMAX. If, however, there is no sale in the primary market
during the time-out period, execution will occur at the stopped price
at the end of the time-out period.
The Commission finds appropriate the combining of the two options
currently available under the pilot program into one option, now called
Enhanced SuperMAX, even if no orders have been executed on the Enhanced
SuperMAX pilot program. With this approach, the Exchange has
streamlined the rule and also preserved the option for customers to use
the former Enhanced SuperMAX option. This approach also eliminates the
need for the Exchange to apply to the Commission for a re-activation of
the Enhanced SuperMAX option.
The Commission finds that the pricing and execution features of
Enhanced SuperMAX, as amended, are not inconsistent with the
maintenance of fair and orderly auction markets on national securities
exchanges and the protection of investors. The execution criteria of
Enhanced SuperMAX, as amended, should contribute to an orderly market
because they help to reduce the price variations from trade to trade on
low volume.
The Commission recognizes that the increased competition that
results from permitting regional specialists to attract orders from
other markets by providing superior quotations and more efficient order
executions generally enhances market making ability and the quality of
customer order executions. The Commission believes the automated
pricing parameters and execution procedures of the Enhanced SuperMAX
system, as amended, may enhance competition by opening an alternative
electronic order routing and execution system for smaller size orders.
Although the Commission finds that Enhanced SuperMAX, as amended,
would not automatically provide a \1/8\ point price improvement, it
would provide some opportunity for price improvement. The Exchange
indicated in the First Report that 38% of the eligible orders under the
Timed Enhanced SuperMAX algorithm received price improvement,\4\ and in
the Second Report that 44% of the eligible orders under the Timed
Enhanced SuperMAX algorithm received price improvement.\15\ As part of
the Second Report, the Exchange provided a comparison of executions
occurring on one day under SuperMAX and Timed Enhanced SuperMAX
(Enhanced SuperMAX, as amended) for a single stock, Nike, Inc. Under
the SuperMAX algorithm, 12 of 81 eligible trades received \1/8\ point
price improvement. The Exchange determined that if Nike, Inc, had been
on Timed Enhanced SuperMAX, rather than SuperMAX, between two and
twelve orders would have received price improvement, depending on the
length of the time-out period. If the time-out period had been set at
30 seconds, only two orders would have been price improved. If the
time-out period had been set at 30 seconds, only two orders would have
been priced improved. If the time-out period had been set at 5 minutes,
12 orders would have been price improved, and one of those orders would
have received \1/4\ price improvement. The Exchange concluded that
Timed Enhanced SuperMAX could provide greater price improvement than
the SuperMAX algorithm under certain circumstances.\16\
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\14\ First Report, supra note 12 at 2.
\15\ Second Report, supra note 12 at 2.
\16\ Id.
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The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication thereof
in the Federal Register. The Commission believes that it is appropriate
to approve the proposed rule change on an accelerated
[[Page 10104]]
basis so that the Exchange can enable public customers to receive the
benefits of Enhanced SuperMAX, as amended, without the interruption
that would result if the pilot program were allowed to expire on March
1, 1997 without permanent approval of the program in place. Moreover,
both the Enhanced SuperMAX and Timed Enhanced SuperMAX have operated
without any significant problems as pilot programs since July, 1995.
Finally, the Commission received no comments on the Exchange's earlier
request for permanent approval of the pilot, which was published for
comment on November 20, 1996.\17\ The Commission, therefore, believes
that granting accelerated approval of the proposed rule change is
appropriate and consistent with Section 6(b)(5) of the Act.\18\
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\17\ Securities Exchange Act Release No. 37497 (November 13,
1996), 61 FR 59124.
\18\ 15 U.S.C. 78f.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submission
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington DC 20549. Copies
of the submissions, 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 in the
Commission's Public Reference Room, 450 Fifth Street, NW., Washington,
DC 20549. Copies of such filing also will be available for inspection
and copying at the Exchange. All submissions should refer to File No.
SR-CHX-97-02 and should be submitted by March 26, 1997.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\19\ that the proposed rule change be, and hereby is, approved on
an accelerated basis.
\19\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12)
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-5369 Filed 3-4-97; 8:45 am]
BILLING CODE 8010-01-M
