[Federal Register Volume 63, Number 143 (Monday, July 27, 1998)]
[Notices]
[Pages 40147-40148]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19986]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40235; File No. SR-CHX-98-09]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by The Chicago Stock Exchange, Incorporated Amending the
SuperMax and Enhanced SuperMax Algorithms
July 17, 1998.
I. Background
On April 20, 1998, noticed 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 pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'').\1\ The proposed rule change was
published for comment in the Federal Register.\2\ The Commission
granted accelerated approval to part of the proposal, the new SuperMAX
algorithm, on a temporary basis until August 20, 1998. No comment
letters were received. For the reasons discussed below, the Commission
is approving the proposed rule change on a permanent basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 40017 (May 20, 1998), 63
FR 29277 (May 28, 1998).
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II. Description of the Proposal
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
automated price improvement under SuperMax and Enhanced SuperMAX in \1/
16\th point markets.\3\
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\3\ Both the SuperMAX and Enhanced SuperMAX programs have been
approved by the Commission on a permanent basis. 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 Exchange SuperMax on a permanent basis).
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In 1997, virtually every registered national securities exchange
and national securities association changed their 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.\5\
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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).
\5\ Rather than amending the existing text of the SuperMax and
Exchange 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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Under the new simplified algorithm for SuperMax, small agency
market orders \6\ 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 \1/16\th of a
point price improvement from the Intermarket Trading System (``ITS'')
best bid or offer (``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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\6\ 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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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 enable.
[[Page 40148]]
Currently, some specialists have only turned on the Exchange Super Max
program without enabling the SuperMax program.
Under the new simplified algorithm for Enhanced SuperMax, small
agency market orders \7\ would be eligible for price improvement if the
market for the security is quoted with a spread of \3/16\ 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 \1/8\ 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 SuperMax.) Once stopped, an order would receive \1/
16\ 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\ 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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\7\ 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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III. Discussion
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. Specifically,
the Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act \8\ 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 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.
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\8\ 15 U.S.C. 78f(b)(5).
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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.\9\ 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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\9\ 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 Commission believes, in light of the industry's move to trading
in finer increments last year, that CHX's modification to price
improvement algorithms will provide investors a meaningful opportunity
for price improvement when securities trading in \1/16\'s 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.\10\ The
Commission believes that, because the opportunity for price improvement
is automatic and without any specialist intervention, SuperMAX and
Enhanced SuperMAX facilitate order interaction and enhance 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 System
issues,\11\ providing a greater number of investors an opportunity to
achieve price improvement is compatible with the views on best
execution expressed in the Order Handling release.\12\
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\10\ 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.
\11\ Dual Trading issues are issues 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 the American Stock Exchange.
\12\ See Securities Exchange Act Release No. 37619A (September
6, 1996), 61 FR 48290 (September 12, 1996).
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IV. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change, SR-CHX-98-09, is consistent with the Act and the rules and
regulations thereunder applicable to a national securities exchange. In
addition, in approving this rule, the Commission notes that it has also
considered the proposed rule's impact on efficiency, competition, and
capital formation.
It is therefore ordered, pursuant to Section 19(b)(2), of the
Act,\13\ that the proposed rule change be, and hereby is, approved.
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\13\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-19986 Filed 7-24-98; 8:45 am]
BILLING CODE 8010-01-M
