[Federal Register Volume 63, Number 102 (Thursday, May 28, 1998)]
[Notices]
[Pages 29277-29282]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14113]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40017; File No. SR-CHX-98-09]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Partial Temporary Approval of Proposed Rule Change
by the Chicago Stock Exchange, Incorporated Amending the SuperMAX and
Enhanced SuperMAX Algorithms
May 20, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on April 20, 1998, 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, on a
temporary basis, for a portion of the proposed rule change relating to
a new SuperMAX algorithm.
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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 proposes to amend its SuperMAX and Enhanced SuperMAX
programs, located in subsections (c) and (e) of Rule 37 of Article XX.
Specifically, the Exchange is proposing new algorithms to provide price
improvement under SuperMAX and Enhanced SuperMAX in \1/16\th point
markets. Below is the text of the proposed rule change, additions are
italicized; deletions are bracketed.
(c) SuperMAX.
[The Exchange's SuperMAX program shall be an automatic execution
program within MAX in which a Specialist may voluntarily choose to
participate on a stock-by-stock basis. A Specialist shall decide if his
or her stock will be eligible for SuperMAX treatment. In the event that
a Specialist determines that his stock is eligible for SuperMAX and
voluntarily chooses to participate in SuperMAX, small agency market
orders in that stock will automatically be executed in MAX, through the
SuperMAX program, without any Specialist intervention based on the
following criteria (for purposes of this Rule, small market orders
shall mean orders up to and including 599 shares, except for the 500
stocks listed in the
[[Page 29278]]
S&P 500TM Index, in which case, small market orders shall
mean orders up to and including 1099 shares):
(1) Pricing.
(i) Both buy and sell orders in markets quoted with less than \1/4\
point spread or orders which do not meet the criteria in (ii) or (iii)
below will be executed based on the ITS BBO.
(ii) Buy orders in markets quoted with a \1/4\ point spread or
wider will be executed at a price \1/8\th point better than the ITS
Best Offer if (i) an execution at the ITS Best Offer would create a
double up tick based upon the last sale in the primary market or (2) an
execution at the ITS Best Offer would result in a greater than a \1/
8\th point price change from the last sale in the primary market.
(iii) Sell orders in markets quoted with a \1/4\ point spread or
wider will be executed at a price \1/8\th point better than the ITS
Best Bid if (i) an execution at the ITS Best Bid would create a double
down tick based upon the last sale in the primary market or (2) an
execution at the ITS Best Bid would result in a greater than a \1/8\th
point price change from the last sale in the primary market.
For example, the execution price for a market buy order in a \1/4\-
\1/2\ quoted market is as follows:
------------------------------------------------------------------------
Tick/last sale Execution price
------------------------------------------------------------------------
+\1/2\................................. \1/2\
+\3/8\................................. \3/8\
-\3/8\................................. \1/2\
-\1/4\................................. \3/8\
+\1/4\................................. \3/8\ (if in range)
------------------------------------------------------------------------
The execution price for a market buy order in a \1/4\-\5/8\ quoted
market is as follows:
------------------------------------------------------------------------
Tick/last sale Execution price
------------------------------------------------------------------------
+\5/8\............................................... \5/8\
+\1/2\............................................... \1/2\
\3/8\................................................ \1/2\
-\1/2\............................................... \5/8\
-\3/8\............................................... \1/2\
-\1/4\............................................... \1/2\
+\1/4\............................................... \1/2\
------------------------------------------------------------------------
(2) Operating Time. SuperMAX will operate each day that the
Exchange is open for trading from 8:45 a.m. (C.T.) until the close.
During volatile periods, individual stocks or all stocks may be removed
from SuperMAX with the approval of two members of the Committee on
Floor Procedure.
(3) Timing. Orders entered into SuperMAX shall be immediately
executed without any delay (i.e. 0 seconds).
(4) Applicability to Odd-Lots. Although an order generated by the
Odd-Lot Execution Service (``OLES'') is a professional order (because
it is deemed to be for the account of a broker-dealer), it is
nonetheless eligible for SuperMAX execution if: (i) the issue is on
SuperMAX, (ii) it is an order for 200 shares or less, and (iii) it is
an OLES passively driven, system-generated market order (and not an
actively managed order).
(5) Other. Any eligible order in a stock included in SuperMAX which
is manually presented at the Specialist post by a floor broker must
also be guaranteed an execution by the Specialist pursuant to the
criteria set forth in (1) above. In the event that a contra side order
which would better a SuperMAX execution is presented at the post, the
incoming order which is executed pursuant to the SuperMAX criteria must
be adjusted to the better price.]
SuperMAX shall be a voluntary automatic execution program within
the MAX System. SuperMAX shall be available for Dual Trading System
securities. Dual Trading System securities are securities that are
traded on both the Exchange and either the New York Stock Exchange or
the American Stock Exchange. A specialist may choose to enable this
voluntary program within the MAX System on a security-by-security
basis. In the event that the security is eligible for SuperMAX and the
specialist in such security has chosen to engage SuperMAX for such
security, small agency market orders in that security will
automatically be executed in accordance with the SuperMAX algorithm, as
set forth below. For purposes of this subsection (c), the term ``small
agency market order'' shall mean an agency order from 100 shares up to
and including 499 shares (or such greater amount specified by the
specialist and approved by the Exchange).
(1) Pricing.
(i) In the event that a small agency market order to buy or sell is
received in a security in which SuperMAX has been enabled, such order
shall be executed at the ITS Best Offer (for a buy order) or ITS Best
Bid (for a sell order) if (A) the spread between the ITS Best Bid and
the ITS Best Offer in such security at the time the order is received
is less than \1/8\th of a point, or (B) the order does not
meet the criteria in (ii) below.
(ii) In the event that a small agency market order to buy or sell
is received in a security in which SuperMAX has been enabled, and the
last primary market sale is at least 1/8th of a point lower than (for a
buy order) or higher than (for a sell order) the ITS Best Offer (for a
buy order) or the ITS Best Bid (for a sell order), such order shall be
executed a \1/16\th of a point lower than the ITS Best Offer
(for a buy order) or \1/16\th of a point higher than the ITS
Best Bid (for a sell order).
(2) Operating Time.
SuperMAX will operate each day that the Exchange is open for
trading from 8:45 a.m. (C.T.) until the close of the Primary trading
Session. A specialist may enable or remove SuperMAX for a particular
security only on one given day each month, as determined by the
Exchange from time to time. Notwithstanding the previous sentence,
during unusual market conditions, individual securities or all
securities may be removed from SuperMAX with approval of two members of
the Committee on Floor Procedure.
(3) Timing.
Orders entered into SuperMAX shall be immediately executed upon
completion of the algorithm without any delay (i.e., 0 seconds).
(4) Applicability to Odd-Lots.
Although an order generated by the Odd-Lot Execution Service
(``OLES'') is a professional order (because it is deemed to be for the
account of a broker-dealer), it is nonetheless eligible for SuperMAX
execution if: (i) the issue is on SuperMAX, (ii) it is an order for 200
shares or less, and (iii) it is an OLES passively driven, system-
generated market order (and not an actively managed order).
(5) Out of Range.
Notwithstanding anything herein to the contrary, SuperMAX will not
automatically execute an order if such execution would result in an out
of range execution.
(6) Other.
Any eligible order in a security included in SuperMAX, which is
manually presented at the Specialist post by a floor broker must also
be guaranteed an execution by the Specialist pursuant to the criteria
set forth in (1) above. In the event that a contra side order which
would better a SuperMAX execution is presented at the post, the
incoming order which is executed pursuant to the SuperMAX criteria must
be adjusted to the better price.
(d) No change in text.
(e) Enhanced SuperMAX
[The Exchange's Enhanced SuperMAX program shall be an automatic
execution program within MAX in which a specialist may voluntarily
choose to participate on a stock-by-stock basis. A specialist shall
decide if his or her stock will be eligible for Enhanced SuperMAX
treatment. In
[[Page 29279]]
the event that a stock is eligible for Enhanced SuperMAX treatment
(pursuant to paragraph (e) of this Rule) and SuperMAX treatment
(pursuant to paragraph (c) of this Rule) at the same time, the size of
the order and the inclusion of the security in the S&P 500TM
Index will determine which program will be followed for execution. If a
stock is not included in the S&P 500TM Index, an order of
299 shares or less will execute according to the SuperMAX program and
an order from 300 shares up to and including 1099 shares (or such
greater size specified by the specialist and approved by the Exchange)
will execute according to the Enhanced SuperMAX program. If a stock is
included in the S&P 500TM Index, or if a specialist in a
non-S&P 500TM Index issue so chooses, an order of 599 shares
or less will execute according to the SuperMAX program and an order
from 600 shares up to and including 1099 shares (or such greater size
specified by the specialist and approved by the Exchange) will execute
according to the Enhanced SuperMAX program. In the event that a
specialist determines that his stock is eligible for Enhanced SuperMAX
only and voluntarily chooses to participate in Enhanced SuperMAX,
agency market orders up to and including 1099 shares (or such greater
size specified by a specialist and approved by the Exchange) in that
stock may automatically be stopped and executed in MAX, through the
Enhanced SuperMAX program, without any specialist intervention based on
the following criteria:
(1) Stopping. If an agency market order eligible for Enhanced
SuperMAX would create either a double up tick (buy order) or double
down tick (sell order) if the order was executed at the ITS BBO, the
Enhanced SuperMAX program will ``stop'' the order. Once stopped, the
order will not receive an execution that is worse than the stopped
price. Notwithstanding anything in the previous sentence to the
contrary, agency market orders in markets quoted in less and a \1/4\
point market will not be stopped. Orders not stopped will be
immediately executed based upon the ITS BBO as the case may be.
(2) Pricing. Buy orders stopped under (1) above will be executed as
follows:
(i) If the next primary market sale is equal to or less than the
last sale then the stopped order will be executed at such last sale
price (subject, however, to the Exchange's block protection policy as
set forth in interpretation and policy .06 of Rule 7 of this Article).
(ii) If the next primary market sale is greater than the last sale
then the stopped order will be executed at such next primary market
sale price. However, if the next primary market sale is greater than
the stopped price then the stopped order will be filled at the stopped
price.
Sell orders stopped under (1) above will be executed as follows:
(iii) If the next primary market sale is equal to or greater than
the last sale then the stopped order will be executed at such last sale
price (subject, however, to the Exchange's block protection policy as
set forth in interpretation and policy .06 of Rule 7 of this Article).
(iv) If the next primary market sale is less than the last sale
then the stopped order will be executed at such primary market sale
price. However, if the next primary market sale is less than the
stopped price then the stopped order will be filled at the stopped
price.
Notwithstanding anything in this paragraph (2) to the contrary,
orders stopped under this paragraph that are subject to a Time Out
Period (as defined below) shall be executed at the stopped price if
there are no executions in the primary market at the end of the
applicable Time Out Period. The Time Out Period shall be the time
specified by the specialist on a stock-by-stock basis based on the size
of the order. Such Time Out Period may be changed by a specialist no
more frequently than once a month and may be no less than 30 seconds. A
specialist shall not be required to specify a Time Out Period. If no
Time Out Period is specified, no Time Out Period shall apply.
(3) Operating Time. Enhanced SuperMAX will operate each day that
the Exchange is open for trading from 8:45 a.m. (C.T.) until the close.
A specialist may make a particular stock eligible for Enhanced SuperMAX
and may remove a particular stock from Enhanced SuperMAX only on one
given day each month, as determined from time to time by the Exchange.
Notwithstanding anything in the previous sentence to the contrary, in
unusual trading situations, individual stocks or all stocks may be
removed from Enhanced SuperMAX with the approval of two members of the
Committee on Floor Procedure.
(4) Timing. Orders entered into Enhanced SuperMAX shall, when due a
fill under the Enhanced SuperMAX program, be immediately executed
without any delay (i.e. 0 seconds).
(5) Applicability to Odd-Lots. Although an order generated by the
Odd-Lot Execution Service (``OLES'') is a professional order (because
it is deemed to be for the account of a broker-dealer), it is
nonetheless eligible for Enhanced SuperMAX execution if: (i) the issue
is on Enhanced SuperMAX, (ii) it is an order for 200 shares or less,
and (iii) it is an OLES passively drive, system-generated market order
(and not an actively managed order).
(6) Out of Range. Notwithstanding anything in this paragraph (e) to
the contrary, Enhanced SuperMAX will not execute an order at the ITS
BBO if such execution would result in an out of range execution.
(7) Other. Any eligible order in a stock included in Enhanced
SuperMAX which is manually presented at the Specialist post by a floor
broker must also be guaranteed an execution by the Specialist pursuant
to the criteria set forth in this paragraph (e). In the event that a
contra side order which would better an Enhanced SuperMAX execution is
presented at the post, the incoming order which is executed pursuant to
the Enhanced SuperMAX criteria must be adjusted to the better price.]
Enhanced SuperMAX shall be a voluntary automatic execution program
within the MAX System. Enhanced SuperMAX shall be available for any
Dual Trading System security in which SuperMAX has been enabled. A
specialist may choose to enable this voluntary program within the MAX
System on a security-by-security basis. In the event that the security
is eligible for Enhanced SuperMAX and the specialist in such security
has chosen to engage Enhanced SuperMAX for such security, small agency
market orders in that security will automatically be executed in
accordance with the Enhanced SuperMAX algorithm, as set forth below.
For purposes of this subsection (e), the term ``small agency market
order'' shall mean an agency order for at least 500 shares, up to and
including 2099 shares (or such greater amount chosen by the specialist
and approved by the Exchange). Notwithstanding the previous sentence,
the smallest size order in a particular security that is eligible for
Enhanced SuperMAX shall always be of a size that is at least one share
greater than the largest size order in such security that is eligible
for SuperMAX.
(1) Stopping.
(i) In the event that a small agency market order to buy or sell is
received in a security in which Enhanced SuperMAX has been enabled, and
both (A) the spread between the ITS Best Bid and the ITS Best Offer in
such security at the time the order is received is equal to or greater
than \3/16\th of a point, and (B) the last primary market sale is at
least \1/8\th of a point lower than (for a buy order) or higher than
(for a sell order) the ITS Best Offer (for a buy
[[Page 29280]]
order) or the ITS Best Bid (for a sell order), Enhanced SuperMAX shall
``stop'' the order at the ITS Best Offer (for a buy order) or at the
ITS Best Bid (for a sell order) for a Time Out Period (as defined
below). Once stopped, the order shall be guaranteed an execution at the
stopped price or better. The Time Out Period shall be the time
specified by the specialist, and approved by the Exchange, on a
security-by-security basis. Such Time Out Period may be changed by a
specialist no more frequently than once a month and may be no less than
30 seconds. If a specialist does not specify a specific Time Out
Period, the Time Out Period shall be 30 seconds.
(ii) In the event that a small agency market order to buy or sell
is received in a security in which Enhanced SuperMAX has been enabled,
and the order is not stopped under (1)(i) above, Enhanced SuperMAX
shall immediately execute the order at the ITS Best Offer (for a buy
order) or at the ITS Best Bid (for a sell order).
(2) Pricing.
(i) In the event that an order has been stopped in accordance with
subsection (1)(i) above, it shall be executed at \1/16\th of a point
better than the stopped price immediately after the first (i.e., next)
primary market sale that occurs during the Time Out Period, but only if
such next primary market sale is at least \1/8\th of a point lower than
(for a buy order) or higher than (for a sell order) the stopped price.
(ii) In the event that an order has been stopped in accordance with
subsection (1)(i) above, it shall be executed at the stopped price
immediately after the first (i.e., next) primary market sale that
occurs during the Time Out Period, but only if such next primary market
sale is less than \1/8\th of a point lower than (for a buy order) or
higher than (for a sell order) the stopped price.
(iii) in the event that an order has been stopped in accordance
with subsection (1)(i) above, it shall be executed at the stopped price
immediately at the end of the applicable Time Out Period if no sale of
the security has occurred in the primary market during such Time Out
Period.
(3) Operating Time.
Enhanced SuperMAX will operate each day that the Exchange is open
for trading from 8:45 a.m. (C.T.) until the close of the Primary
trading Session. A specialist may enable or remove Enhanced SuperMAX
for a particular security only on one given day each month, as
determined by the Exchange from time to time. Notwithstanding the
previous sentence, during unusual market conditions, individual
securities or all securities may be removed from Enhanced SuperMAX with
approval of two members of the Committee on Floor Procedure.
(4) Timing.
Orders entered into Enhanced SuperMAX shall be immediately executed
upon completion of the algorithm without any delay (i.e., 0 seconds).
(5) Applicability to Odd-Lots.
Although an order generated by the Odd-Lot Execution Service
(``OLES'') is a professional order (because it is deemed to be for the
account of a broker-dealer), it is nonetheless eligible for Enhanced
SuperMAX execution if: (i) the issue is on Enhanced SuperMAX, (iii) it
is an order for 200 shares or less, and (iii) it is an OLES passively
driven, system-generated market order (and not an activity managed
order).
(6) Out of Range.
Notwithstanding anything herein to the contrary, Enhanced SuperMAX
will not automatically execute an order if such execution would result
in an out of range execution.
(7) Other.
Any eligible order in a security included in Enhanced SuperMAX,
which is manually presented at the Specialist post by a floor broker
must also be guaranteed an execution by the Specialist pursuant to the
criteria set forth in (1) and (2) above. In the event that a contra
side order which would better a Enhanced SuperMAX execution is
presented at the post, the incoming order which is executed pursuant to
the Enhanced SuperMAX criteria must be adjusted to the better price.
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 Exchange 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
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 (May 26, 1995) (File No. SR-CHX-95-08).
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The CHX now proposes to amend the SuperMAX program and Enhanced
SuperMAX programs. SuperMAX and Enhanced SuperMAX are two existing CHX
programs within the MAX System that use computerized algorithms to
provide automated price improvement. Both of these programs have been
approved by the Commission on a permanent basis.\3\
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\3\ See Securities Exchange Act Release No. 32631 (July 14,
1993), 58 FR 39069 (July 21, 1993) (File No. SR-MSE-93-10) (Order
approving SuperMAX on a permanent basis), Securities Exchange Act
Release No. 38338 (February 26, 1997), 62 FR 10102 (March 5, 1997)
(File No. SR-CHX-97-02) (Order approving Enhanced SuperMAX on a
permanent basis).
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Background. In 1997, virtually every registered national securities
exchange and national securities association changed its minimum
trading variation to one sixteenth of a point or smaller. Although the
CHX made some technical changes to its SuperMAX and Enhanced SuperMAX
programs at that time in light of assumptions as to the smallest
minimum variation that were contained in the text of the SuperMAX and
Enhanced SuperMAX rules, the CHX did not change the algorithms to
reflect the additional price improvement opportunities that are
available because of trading in sixteenths.\4\ The purpose of the
proposed rule change is to amend the existing programs to both simplify
the price improvement algorithms and increase the number of orders that
are eligible for price improvement due to the smaller minimum trading
variation. Rather than amending the existing text of the SuperMAX and
Enhanced SuperMAX rules, the text of the existing rule has been deleted
and replaced with new language. This was done to permit the Exchange to
re-write the rule, with non-substantive changes, to clarify some
language in the old rule that may have been ambiguous.
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\4\ See Securities Exchange Act Release No. 38816 (July 3,
1997), 62 FR 37325 (July 11, 1997) (File No. SR-CHX-97-18).
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Proposal. The existing SuperMAX and Enhanced SuperMAX programs are
voluntary programs in which a specialist may choose to participate.
Participation is on a security-by-security
[[Page 29281]]
basis and is currently limited to Dual Trading System issues (i.e.,
issues traded on both the CHX and either the New York Stock Exchange or
American Stock Exchange). A specialist can only activate and de-
activate the program with respect to a given security once a month (a
date determined by the specialist). Once activated with respect to a
security, small agency market orders \5\ in markets quoted with a
spread of \1/4\ point or more are eligible for automated price
improvement. Once eligible, the program runs through an algorithum that
may provide price improvement under certain circumstances. The existing
SuperMAX program provides price improvement to the order if executing
the order at the ITS BBC \6\ (the ITS best offer for a buy order, and
the ITS best bid for a sell order) would create either a double uptick
or double down tick based on the last primary market sale. The program
also provides price improvement if such an execution would result in
greater than a \1/8\th point price change from the last primary market
sale. Under the existing Enhanced SuperMAX program, rather than
executing an order based on the last primary market sale, eligible
orders are ``stopped'' at the ITS BBO and are executed with reference
to the next primary market sale. The Enhanced SuperMAX program also
includes a time-out feature whereby 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 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.
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\5\ For SuperMAX, small agency market orders are orders from 100
shares to 599 shares (or a greater amount chosen by the specialist).
For Enhanced SuperMAX these are orders from 100 shares to 1099
shares (or a greater amount chosen by the specialist).
\6\ As used in the CHX rules, ITS BBO means the best bid or
offer among the American, Boston, Cincinnati, Chicago, New York,
Pacific, Philadelphia or the Intermarket Trading System/Computer
Assisted Execution System quote. See CHX Art. XX, Rule 37(a)(2).
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This proposed rule change simplifies the pricing algorithms used by
SuperMAX and Enhanced SuperMAX and provides a greater opportunity for
price improvement.
Under the new simplified algorithm for SuperMAX, small agency
market orders \7\ would now be eligible for price improvement if the
market for the security is quoted with a spread of \1/8\ of a point or
greater (rather than the \1/4\ point spread that is required under the
existing rule). In addition, the double-up/double down concept has been
eliminated. The simplified algorithm will now provide 1\1/16\th of a
point price improvement from the ITS BBO if an execution at the ITS BBO
would be at least \1/8\th point higher than (for a buy order) or lower
than (for a sell order) the last primary market sale. Basically price
improvement is given under certain circumstances when the security is
trading between the spread. All other aspects of the existing
algorithm, including operating time, timing of execution, applicability
to odd-lots, and out of range situations, remain the same.
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\7\ Under the proposal, small agency market orders for SuperMAX
would be orders from 100 shares to 499 shares (or a greater amount
chosen by the specialist).
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The Exchange has compared the proposed changes to SuperMAX with the
existing SuperMAX algorithm and believes that the new algorithm will
provide price improvement to a greater number of trades. Using data for
January 1998, the Exchange determined that the proposed changes to the
algorithm would have resulted in over 32,000 trades receiving price
improvement (for a total savings of $329,000 to customers), as opposed
to the 5800 trades that received price improvement (for a total savings
of $126,000 to customers) under the existing SuperMAX program. This
means that the changes to SuperMAX would have resulted in customers
receiving 203,000 additional dollars of price improvement over the
Exchange's existing SuperMAX algorithm.
With respect to Enhanced SuperMAX, the Exchange proposes to make
this program an add-on feature for securities for which the SuperMAX
program has already been activated, rather than a stand-alone program.
As stated in the Exchange's Report on the operation of the Enhanced
SuperMAX program that was provided to the Commission in advance of the
Commission's permanent approval of Enhanced SuperMAX program, taken as
a whole, the existing SuperMAX program provides more price improvement
than the existing Enhanced SuperMAX program. The Exchange believes that
interconnecting the two programs will encourage more specialists to
enable the SuperMAX program, with greater resulting price improvement,
since the Enhanced SuperMAX program will only be available when
SuperMAX is enabled. Currently, some specialists have only turned on
the Enhanced SuperMAX program without enabling the SuperMAX program.
Under the new simplified algorithm for Enhanced SuperMAX, small
agency market orders \8\ would be eligible for price improvement if the
market for the security is quoted with a spread of \3/16\th
of a point (rather than the \1/4\ point spread that is required under
the existing rule). In addition, the double-up/double down concept
currently in place to determine whether an order is stopped has been
eliminated. The simplified algorithm will now ``stop'' an eligible
order at the ITS BBO if an execution at the ITS BBO would be at least
\1/18\th point higher than (for a buy order) or lower than
(for a sell order) the last primary market sale. (This stopping
algorithm is identical to the new algorithm above for Super MAX.) Once
stopped, an order would receive \1/16\th price improvement
over the stopped price if the next primary market sale occurs before
the end of the Time Out Period and the sale is at least \1/
8\th of a point lower than (for a buy order) or higher than
(for a sell order) the stopped price. As is the case for SuperMAX, all
other aspects of the existing algorithm, including operating time,
timing of execution, applicability to odd-lots, and out of range
situations, remain the same.
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\8\ Under the proposal, small agency market orders for Enhanced
SuperMAX would be orders from 500 shares to 2099 shares (or a
greater amount chosen by the specialist). Notwithstanding the 500
share minimum order size contained in the rule, the smallest size
order eligible for Enhanced SuperMAX must always be at least one
share greater than the largest size order in such security that is
eligible for SuperMAX. In other words, if a specialist voluntarily
increases the maximum order size for SuperMAX, the minimum order
size for Enhanced SuperMAX must be increased accordingly.
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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. The proposed rule change
accomplishes these ends by increasing the number of trades that will be
eligible for automated price improvement.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange 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
No written comments were either solicited or received.
[[Page 29282]]
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing including whether the proposed rule
change 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
Exchange. All submissions should refer to File No. SR-CHX-98-09 and
should be submitted by June 18, 1998.
IV. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the publication of the 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 such proposed rule change, or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.
V. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission finds that part of the Exchange's proposal modifying
the price improvement algorithm amending SuperMAX is consistent with
the requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange. Specifically, the
Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\9\ which requires that the rules of an
exchange be designed, among other things, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.\10\ The Commission believes,
in light of the industry's move to trading in finer increments last
year, that CHX's modification to its price improvement algorithms will
provide investors a meaningful opportunity for price improvement when
securities trading in \1/16\ths have a spread of \1/8\ point or
greater. In addition, the Commission finds that the new SuperMAX and
Enhanced SuperMAX rules provide greater price improvement opportunities
for investors because the criteria for when such opportunities are
available has been simplified. The Commission believes that because the
opportunity for price improvement is automatic and without any
specialist intervention, SuperMAX \11\ and Enhanced SuperMAX facilitate
order interaction and enhance the execution of customer orders
consistent with Section 6(b)(5) of the Act. The Commission notes that
while SuperMAX and Enhanced SuperMAX are voluntary programs that
specialists choose to participate in for Dual Trading Systems issues,
providing a greater number of investors an opportunity to achieve price
improvement is compatible with the view expressed in the Order Handling
release.\12\
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\9\ 15 U.S.C. 78f(b)(5).
\10\ In approving this rule, the Commission notes that it has
also considered the proposed rule's impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
\11\ The CHX presently has the ability to install the new
SuperMAX algorithm.
\12\ See Securities Exchange Act Release No. 37619A (September
6, 1996), 61 FR 48290 (September 12, 1996).
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The Commission therefore finds good cause for granting partial
approval to the proposed rule change (SR-CHX-98-09) with respect to the
adoption of a new SuperMAX prior to the thirtieth day after date of
publication of notice of filing thereof in the Federal Register. The
Commission is granting this partial approval on a temporary basis,
until August 20, 1998.
The Commission is therefore granting accelerated approval for the
new SuperMAX algorithm on a temporary basis, until August 20, 1998.\13\
The Commission is deferring action on the new Enhanced SuperMAX to
provide interested parties an opportunity to comment on the proposal.
In addition, the Commission and the CHX will have the opportunity to
review the implementation of the new SuperMAX algorithm.
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\13\ The proposal to permanently adopt the new SuperMAX will be
considered with the proposal to approve the adoption of the new
Enhanced SuperMAX.
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The changes to the SuperMAX algorithm will be phased in during the
next month. Until the Enhanced SuperMAX proposal is adopted, the
existing Enhanced SuperMAX algorithm will continue to apply. In those
instances where a security is both on the new SuperMAX algorithm and
the old Enhanced SuperMAX algorithm, the size of the order will
determine which algorithm is used. The introductory paragraph of
existing Rule 37(e) that describes the interaction between SuperMAX and
Enhanced SuperMAX for a security on both systems shall be deemed to be
amended such that if an order is for between 100 shares and 499 shares,
the new SuperMAX algorithm shall apply, and if the order is for 500
shares or more (up to the 2099 shares or such greater amount specified
by the specialist and approved by the Exchange), the old Enhanced
SuperMAX algorithm shall apply.
It is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the proposed rule change (SR-CHX-98-09) be, and hereby
is, approved in part and on a temporary basis.
\14\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(1)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-14113 Filed 5-27-98; 8:45 am]
BILLING CODE 8010-01-M
