[Federal Register Volume 63, Number 65 (Monday, April 6, 1998)]
[Notices]
[Pages 16840-16841]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-8925]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39803; File No. SR-CHX-97-32]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Chicago Stock Exchange, Incorporated Relating to the
Acceptance of Oversized Orders in the MAX System
March 25, 1998.
I. Introduction
On December 9, 1997, the Chicago Stock Exchange, Incorporated
(``CHX'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') pursuant to Section 19(b)(1) of the
Securities Act of 1934 (``Act''),\1\ a proposed rule change which was
subsequently amended on January 9, 1998. The proposed rule change to
amend the Exchange's rules relating to the entry and acceptance of
oversized orders received through the MAX System was published for
comment in the Federal Register on February 11, 1998.\2\ No comments
were received on the proposal. For the reasons discussed below, the
Commission is approving the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 39615 (February 3,
1998).
---------------------------------------------------------------------------
II. Description of the Proposal
Under the Exchange's BEST Rule, Exchange specialists are required
to guarantee executions of all agency \3\ market and limit orders for
Dual Trading System issues \4\ from 100 shares up to and including 2099
shares. Subject to the requirements of the short sale rule, market
orders must be executed on the basis of the Intermarket Trading
System's (``ITS'') best bid or offer (``BBO''). Limit order must be
executed at their limit price or better when: (1) the ITS BBO at the
limit price has been exhausted in the primary market; (2) there has
been a price penetration of the limit in the primary market (generally
known as a trade-through of a CHX limit order); or (3) the issue is
trading at the limit price on the primary market unless it can be
demonstrated that the order would not have been executed if it had been
transmitted to the primary market \5\ or the broker and specialist
agree to a specific volume related to, or other criteria for, requiring
an execution.
---------------------------------------------------------------------------
\3\ The term ``agency order'' means an order for the account of
a customer, but does not include professional orders as defined in
CHX, Art. XXX, Rule 2, interpretation and policy .04. That Rule
defines a ``professional order'' as any order for the account of a
broker-dealer, or any account in which a broker-dealer or an
associated person of a broker-dealer has any direct or indirect
interest.
\4\ Dual Trading System Issues are issues that are traded on the
CHX, either through listing on the CHX or pursuant to unlisted
trading privileges, and are also listed on either the New York Stock
Exchange or American Stock Exchange.
\5\ The CHX specialist has the burden to demonstrate that the
order would not have been executed had it been routed to the primary
market. The Commission notes that this is often accomplished by
sending a ``marker'' order to the primary market. See also CHX
Article XX, Rule 37(b)(12).
---------------------------------------------------------------------------
As stated above, the Exchange's MAX System provides for the
automatic execution of orders that are eligible for execution under the
Exchange's BEST Rule and certain other orders.\6\ The MAX System has
two size parameters which must be designated by the specialist on a
stock-by-stock basis. For Dual Trading System issues, the specialist
must set the auto-execution threshold at 1099 shares or greater and the
auto-acceptance threshold at 2099 shares or greater. In no event may
the auto-acceptance threshold be less than the auto-execution
threshold. If the order-entry firm sends an order through MAX that is
less than or equal to the auto-execution threshold, the order is
executed automatically, unless an exception applies. If the order-entry
firm sends an order through MAX that is less than the auto-acceptance
threshold but greater than the auto-execution threshold, the order is
not available for automatic execution but is designated in the open
order book. A specialist may manually execute any portion of the order;
the difference must remain as an open order.
---------------------------------------------------------------------------
\6\ A MAX order that fits under the BEST parameters must be
executed pursuant to BEST Rules via the MAX system. If the order is
outside the BEST parameters, the BEST Rules do not apply, but MAX
system handling rules do apply.
---------------------------------------------------------------------------
Under the current MAX rules, if the order-entry firm sends an order
through the MAX System that is greater than the specialist's auto-
acceptance threshold, a specialist may cancel the order within three
minutes of it being entered into MAX. If not canceled by the
specialist, the order is designated as an open order.\7\ The Exchange
proposed to change the way that these oversized orders are handled.
---------------------------------------------------------------------------
\7\ Under current rules, if an oversized market or limit order
is received by the specialist, he must either reject the order
immediately or immediately display it in accordance with CHX rules
and the Commission's Order Execution Rules (Securities Exchange Act
Release No. 37619A (Sept. 6, 1996), 61 FR 48290 (Sept. 12, 1996)).
If the order is displayed, the specialist must check with the order
entry broker to determine the validity of the oversized order.
During the three minute period, the specialist can cancel the order
and return it to the order entry firm, but until it is canceled the
displayed order is eligible for execution.
---------------------------------------------------------------------------
First, the Exchange proposed to amend Rule 37(b)(1) of Article XX
to
[[Page 16841]]
change the amount of time in which the specialist can cancel the
oversized order. Rather than the current three minute window, the
Exchange proposed to reduce this time period to one minute. If the
specialist has not canceled the order in the one minute period, the
order will be designated as an open order.
Second, the Exchange proposed to add interpretation and policy .06
to Rule 37 to specifically describe how oversized orders are to be
handled during the one minute period in which the specialist can cancel
the order. The interpretation will provide that if the oversized order
is an agency limit order, the order must immediately be reflected in
the specialist's quote in accordance with CHX rules.\8\ Additionally,
during the one minute window, the order must receive ``post
protection.'' This means that while the BEST Rule will not apply during
this period, the specialist must allow the order to interact with other
orders received by the specialist at the post, using the same priority
and precedence rules that apply to other orders received at the post.
---------------------------------------------------------------------------
\8\ Article XX, Rule 7 of the CHX rules requires every limit
order that is priced at or better than the specialist's quote to be
included in the specialist's quote, subject to certain exceptions.
---------------------------------------------------------------------------
Finally, during the one minute window, the specialist must notify
the order sending firm's MAX floor broker representative if the
specialist determines to cancel the order.
III. Discussion
The Commission believes that the proposed rule change is consistent
with the Act and the rules and regulations thereunder applicable to a
national securities exchange, and, in particular, with Section 6(b)(5)
which requires that the rules of an exchange be 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.\9\
---------------------------------------------------------------------------
\9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange's proposal reduces the amount of time that a CHX
specialist has to reject an order that is larger than the auto-
acceptance threshold thereby reducing an impediment to a free and open
market. The Commission believes that this will benefit investors
because the firm sending the order to the CHX specialist will be more
certain of the ultimate status of the order and will no longer have to
wait three minutes to determine if the order was being accepted or
rejected by the specialist.
The Commission believes that it is necessary to impose specific
duties on the CHX specialist during the one minute window to ensure
that orders are handled consistent with best execution principles. The
Commission believes that the Exchange's proposed interpretation and
policy .06 to Rule 37 will benefit investors because it clarifies the
obligations of the CHX specialist during the one minute period in which
the specialist can cancel the order. For example, customer limit orders
that are received by the CHX specialist must be displayed immediately,
in accordance with the Commission's Limit Order Display Rule \10\ and
the Exchange's limit order rule,\11\ even when the size of the limit
order is in excess of the auto-acceptance threshold. In addition, under
the proposed interpretation and policy .06 to Rule 37, CHX specialists
are obligated to give orders in excess of the auto-acceptance threshold
post protection during the one minute window, allowing them to interact
with other orders received by the specialist at the post.
---------------------------------------------------------------------------
\10\ 17 CFR 240.11Ac1-4.
\11\ CHX Article XX, Rule 7.
---------------------------------------------------------------------------
The Commission also believes that reducing the time frame from
three minutes to one minute is an appropriate first step given the many
improvements in technology since the three minute window was
established. The Commission expects the Exchange to continue to
evaluate further reductions as technology advances and causes the one
minute window to be too long a period of time.
IV. Conclusion
For the foregoing reasons, the Commission believes that the
proposed rule change is consistent with the Act and the rules and
regulations thereunder applicable to a national securities exchange,
and, in particular, with Section 6(b)(5).\12\
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-CHX-97-32) be, and hereby
is, approved.
\13\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
---------------------------------------------------------------------------
\14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-8925 Filed 4-3-98; 8:45 am]
BILLING CODE 8010-01-M
