01-6666. Self-Regulatory Organizations; Order Approving Proposed Rule Change by the Chicago Stock Exchange, Incorporated Relating to Preopening Orders

March 12, 2001.

I. Introduction

On October 18, 2000, the Chicago Stock Exchange, Incorporated (“Exchange” or “CHX”), filed with 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 amend the CHX rule governing preopening orders in Nasdaq/NM securities ^[3] to explicitly define “preopening orders” in Nasdaq/NM securities, and to explicitly provide for a single price opening at or better than the NBBO at the first unlocked, uncrossed market. On December 20, 2000, the CHX filed Amendment No. 1 to the proposed rule change.^[4] The proposed rule change was published in the Federal Register on January 22, 2001.^[5] No comments were received on the proposal. This order approves the proposed rule change, as amended.

II. Description of the Proposed Rule Change

The Exchange proposes to amend the CHX rule governing preopening orders in Nasdaq/NM securities to provide for additional clarity regarding the types of orders eligible for treatment as preopening orders and the price at which such orders will be filled. The Exchange represents that because Article XX, Rule 37(a)(4) of the Exchange's rules does not explicitly define what constitutes a preopening order in the case of Nasdaq/NM securities, there has been some confusion as to which orders are eligible for treatment as preopening orders, and consequently, some unintended execution guarantees. The proposed rule change will expressly provide that, for an order to be considered a preopening order, an order must be received at or prior to 8:25 a.m. (Central Time) of the date of the opening.

The Exchange also proposes to provide additional clarity regarding the price at which each preopening order will be filled. Currently, the rule provides that preopening orders for Nasdaq/NM securities must be filled “at the Exchange opening trade price.” The Exchange believes that it is in the best interest of its order-sending firms and their customers to provide for greater specificity as to the parameters governing the fill price for preopening orders. Accordingly, the proposed rule change provides that each preopening order must be filled “on a single price opening at or better than the NBBO at the first unlocked, uncrossed market.”

III. Discussion

After careful review, 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.^[6] In particular, the Commission believes that the proposal is consistent with section 6(b)(5) of the Act,^[7] which requires, among other things, that the rules of an exchange be designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market, and to protect investors and the public interest.

The Commission finds that the Exchange's amendments to its rule governing preopening orders provides greater clarity and alleviates some confusion for investors as to what constitutes “preopening orders” in Nasdaq/NM securities and how such orders are priced. The CHX proposal explicitly defines preopening orders in Nasdaq/NM securities as those orders received at or prior to 8:25 a.m. (Central Time) on the date of the opening. The CHX proposal also specifies that each preopening order must be filled on a single price opening at or better than the NBBO at the first unlocked, uncrossed market.

The Commission finds that the Exchange's proposed rule change is consistent with the Act because it is designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market, and to protect investors and the public interest, by providing more specificity and clarity for order-sending firms and their customers regarding its rule governing preopening orders in Nasdaq/NM securities.

IV. Conclusion

For the foregoing reasons, the Commission finds that the CHX's proposal to amend its rule governing preopening orders in Nasdaq/NM securities, as amended, is consistent with the requirements of the Act and rules and regulations thereunder.

It is Therefore Ordered, pursuant to Section 19(b)(2) of the Act,^[8] that the proposed rule change (SR-CHX-00-31), is approved.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[9]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  See CHX Article XX, Rule 37(a)(4).

4.  In Amendment No. 1, the CHX clarified the proposed rule text to reflect that the 8:25 a.m. cutoff time for preopening orders is “Central Time.” See Letter from Kathleen M. Boege, Associate General Counsel, CHX, to Nancy J. Sanow, Assistant Director, Division of Market Regulation, Commission, dated December 20, 2000 (“Amendment No. 1”).

5.  See Securities Exchange Act Release No. 43835 (January 11, 2001), 66 FR 6718.

6.  In approving this proposal, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78(c)(f).

7.  15 U.S.C. 78f(b)(5).

8.  15 U.S.C. 78s(b)(2).

9.  17 CFR 200.30-3(a)(12).