[Federal Register Volume 60, Number 138 (Wednesday, July 19, 1995)]
[Notices]
[Pages 37115-37117]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17730]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35962; File No. SR-CHX-95-11]
Self-Regulatory Organizations; Chicago Stock Exchange,
Incorporated; Order Granting Approval to Proposed Rule Change Relating
to the Automatic Execution of Limit Orders
July 12, 1995.
I. Introduction
On March 31, 1995, the Chicago Stock Exchange, Incorporated
(``CHX'' or ``Exchange'') submitted to the Securities and Exchange
Commission (``SEC'' or ``Commission''), pursuant to section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to establish a one-year pilot
program \3\ for the automatic execution of non-marketable limit
orders.\4\ The proposed rule change was published for comment in
Securities Exchange Act Release No. 35722 (May 16, 1995), 60 FR 27358
(May 23, 1995). No comments were received on the proposal.
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
\3\ See letter from Craig Long, Foley & Lardner, to Glen
Barrentine, Senior Counsel, Division of Market Regulation, SEC,
dated May 4, 1995 (requesting that the rule filing be approved on a
one-year pilot basis).
\4\ A limit order is an order to buy or sell a stated amount of
a security at a specified price or at a better price.
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II. Proposal
The Exchange proposes to re-implement for a one-year pilot period a
system enhancement that would facilitate the automatic execution of
non-marketable limit orders in a specialist book. In 1993, the
Commission first approved this system enhancement as a one-year pilot
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program.\5\ The original one-year pilot lapsed in April 1994 without
the Exchange filing for an extension or permanent approval.
\5\ See Securities Exchange Act Release No. 32124 (Apr. 13,
1993), 58 FR 21325 (approving File No. SR-MSE-92-03).
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The proposed system enhancement (``Auto-Ex'') is a feature of the
Exchange's automated execution system (``MAX'') that CHX specialists
may voluntarily choose to activate to automatically execute non-
marketable limit orders on a specialist's book. Auto-Ex will operate by
comparing the size of the CHX-entered limit order against the amount of
stock ahead of that order in the primary market when the issue is
trading in the primary market at the limit price.\6\ The Auto-Ex system
will begin comparing CHX-entered limit orders when the limit price
equals the bid or offer quoted in the primary market (as the case may
be) for the first time.\7\ Thereafter, the Auto-Ex system will keep
track of all prints in the primary market and will automatically
execute the limit order once sufficient size prints in the primary
market.\8\ The Auto-Ex feature will not permit a limit order to be
filled out of sequence; the Auto-Ex will execute additional limit
orders at the same price by comparing those orders with shares ahead in
the primary market and on CHX.
\6\ In the original pilot program, the Auto-Ex was to operate by
comparing the size of CHX-entered limit order against the amount of
stock ahead of that order in the ``consolidated market'' rather than
in the primary market. This change is the one modification made by
the Exchange to the original pilot program. Telephone conversation
with Craig Long, Foley & Lardner, and Jennifer Choi, Attorney,
Division of Market Regulation, SEC, on April 17, 1995.
\7\ For example, if the primary market quotation is \1/4\ bid,
\1/2\ offered, 4,000 shares bid and 4,000 shares offered, and a CHX
specialist receives a limit order to buy 2,000 shares for \1/8\,
that limit order will not be compared against the amount of stock
ahead of the order in the primary market until such time as the \1/
4\ bid is exhausted and the \1/8\ bid becomes the best bid. At that
time, the size that is disseminated in the primary market with the
\1/8\ bid is the size against which the limit order is compared for
Auto-Ex purposes.
\8\ For example, assume a CHX specialist receives an agency
limit order to buy 2,000 shares of ABC at \1/2\. The primary market
quotation is \1/2\ bid, \3/4\ offered, 5,000 shares bid and 5,000
shares offered, meaning there are 5,000 shares ahead of the CHX
order. The Auto-Ex system will automatically execute the entire CHX
limit order after 7,000 shares print at \1/2\ in the primary market.
However, when more than 5,000 but less than 7,000 shares print at
\1/2\ in the primary market, the order will be flagged with a
flashing prompt to alert the specialist that the order may be due at
least a partial fill. See CHX Article XX, Rule 37(a) governing
primary market protection of certain limit orders.
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The Auto-Ex feature will execute limit orders in accordance with
existing CHX rules.\9\ All dually traded issues are eligible for
inclusion in Auto-Ex, but specialists will be permitted to choose the
securities for Auto-Ex on an issue by issue basis. Once Auto-Ex is
activated for a certain security, the feature must remain activated for
a minimum of five trading days and can be deactivated only on a certain
day each month, which is determined from time to time by the Exchange.
Generally, the Exchange believes that specialists will choose to use
Auto-Ex for issues that, based on experience, have demonstrated
reliable and accurate quotes in the primary market.\10\ Limit orders
not subject to Auto-Ex will be ``flagged'' with a prompt to alert the
specialist that a fill may be due. The proposed Auto-Ex feature will
apply only to nonmarketable limit orders \11\ and not to marketable
limit orders or to market orders.\12\
\9\ The CHX specialist will be the contra-side of all Auto-Ex
trades. See Securities Exchange Act Release No. 32124 (Apr. 13,
1993), 58 FR 21325 (approving File No. SR-MSE-92-03).
\10\ Telephone conversation between Craig Long, Foley & Lardner,
and Glen Barrentine and Jennifer Choi, Division of Market
Regulation, SEC, on May 3, 1995.
\11\ Under CHX Rule 37(b)(7), specialists generally are required
to automatically execute nonmarketable agency limit orders at the
limit price when there is a price penetration of the limit price in
the primary market.
\12\ A limit order is called ``marketable'' when the prevailing
best offer (bid) is equal to or less (greater) than the limit buy
(sell) order price. CHX Rule 37(b)(7) provides for the automatic
execution at the best bid or best offer disseminated pursuant to
Rule 11Ac1-2 (``BBO'') or better of all limit orders that are
marketable when entered into the MAX system provided that such
orders are of a certain size and otherwise are eligible for
execution under CHX Rule 37(a).
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The Exchange states that the purpose of the proposed rule change is
to further automate the CHX's trading floor functions and to improve
the CHX's performance in filling limit orders. By providing for
automatic execution of limit orders in accordance with existing
Exchange rules, the Exchange states that it is eliminating the need for
the manual operation required of specialists in determining when and to
what extent limit orders are due fills based on primary market prints.
The Exchange notes that the manual effort expended by specialists in
filling limit orders that are entitled to primary market protection is
often time-consuming and can result in errors, particularly when there
is heavy trading volume. The Exchange believes that the present
proposal will, therefore, directly benefit customers because it will
result in more timely fills while eliminating errors resulting from
manual execution.
The Exchange also states that the Auto-Ex feature will not change
or amend any CHX trading rules, nor will it cause or allow limit orders
to be filled under different parameters than under existing rules.
Auto-Ex will only automate the manner in which limit orders are filled.
The Exchanged states that it will continue to monitor specialist
execution of limit orders through the Market Regulation/Surveillance
Department. In addition, CHX specialists will continue to be
responsible for their books to the same degree as they are now under
the manual execution system for limit orders.
III. Discussion and Conclusion
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 the requirements of section 6(b) of the Act.\13\
Specifically, the Commission believes the proposal is consistent with
the section 6(b)(5) requirements that the rules of an exchange be
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. The Commission believes that the proposed rule
change to provide for the automatic execution of non-marketable limit
orders should result in prompt execution of such orders on the Exchange
and reduce errors caused by manual execution of limit orders that are
entitled to primary market protection, especially during periods of
heavy trading volume.
\13\ 15 U.S.C. 78f(b) (1988 & Supp. v 1993).
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As discussed above, the CHX proposal will allow specialists to
choose which issues will be included in Auto-Ex. Although the Exchange
has limited the specialist's discretion in deactivating the Auto-Ex
feature once the system is activated for a particular security, the
specialist does retain the ultimate decision of which stocks will be
executed automatically. The Commission remains concerned with this
aspect of the proposal even though all non-marketable limit orders
should receive the same treatment, whether executed manually or through
the Auto-Ex system.
The Commission believes that it would be appropriate to allow the
Exchange to re-implement Auto-Ex for a one-year period to afford the
Exchange and the Commission an opportunity to monitor the operation of
the pilot and determine its effectiveness.\14\ The
[[Page 37117]]
Exchange should monitor the use of the system during the one-year pilot
period and assure the Commission that manually-executed orders and
Auto-Ex orders do not receive differential treatment. Moreover, the
Exchange should examine the program during the pilot period to
determine whether specialists are choosing the stocks to include in
Auto-Ex on a discriminatory basis.
\14\ The Exchange has indicated that the Auto-Ex system can
become operational immediately upon the approval of the proposal.
Telephone conversation between Craig Long, Foley & Lardner, and
Jennifer s. Choi, Attorney, Division of Market Regulation, SEC, on
July 5, 1995.
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The Commission, therefore, requests that the Exchange submit a
report to the Commission by May 31, 1996, describing its experience
with the pilot program. At a minimum, this report should contain the
following data gathered during the first 10-month period after the
start-up date for Auto-Ex: (1) The total number of issues and
specialists using Auto-Ex including their percentages in comparison to
the Exchange's market as a whole; (2) a break down of each issue
subject to Auto-Ex during the pilot period, including each date the
issue was placed on Auto-Ex and removed; (3) the types of securities
being chosen for Auto-Ex (if a pattern is discernable); and (4) whether
any distinguishable market condition existed when an issue was placed
on or taken off Auto-Ex. The Commission is also interested in the
length of time between a print in the primary market and the resulting
fill on CHX for both the issues on Auto-Ex and those issues not on
Auto-Ex. Any requests to modify this pilot program, to extend its
effectiveness, or to seek permanent approval for the pilot program also
should be submitted to the Commission by May 31, 1996, as a proposed
rule change pursuant to section 19(b) of the Act.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\15\ that the proposed rule change (SR-CHX-95-11) is approved for a
one-year period ending on July 31, 1996.
\15\ U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
\16\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-17730 Filed 7-18-95; 8:45 am]
BILLING CODE 8010-01-M
