[Federal Register Volume 69, Number 137 (Monday, July 19, 2004)]
[Notices]
[Pages 43036-43042]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16322]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-50002; File No. SR-CHX-2004-11]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the Chicago Stock Exchange, Inc.
Relating to the Implementation of a Fully-Automated Electronic Book for
the Display and Execution of Orders in Securities That Are Not Assigned
to a Specialist
July 12, 2004.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on February 20, 2004, the Chicago Stock Exchange, Inc. (``CHX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. On June
18, 2004, the Exchange amended the proposed rule change.\3\ The
Commission is publishing this notice to solicit comments on the
proposed rule change, as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Ellen J. Neely, Senior Vice President and
General Counsel, CHX, to Nancy J. Sanow, Assistant Director,
Division of Market Regulation, Commission, dated June 17, 2004, and
the attached Form 19b-4, which replaced the original filing in its
entirety (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The CHX proposes to implement a fully-automated electronic book for
the display and execution of orders in securities that are not assigned
to a specialist. Below is the text of the proposed rule change.
Proposed new language is in italics; proposed deletions are in
[brackets].
* * * * *
Article XXA
Operation of Electronic Book
The electronic book is a fully-automated system operated by the
Exchange, which allows eligible orders in eligible securities to match
against one another.
Eligible Securities
Rule 1. All securities eligible for trading on the Exchange that
are not assigned to a specialist shall be eligible for trading through
the electronic book. Any specialist request to remove a security from
the electronic book shall be considered by the Committee on Specialist
Assignment and Evaluation.
Eligible Orders
Rule 2.(a) All orders sent to the electronic book must be round-lot
limit orders, specifically designated in the manner specified by the
Exchange to confirm that they are eligible for trading in the
electronic book.
(b) Eligible orders additionally may be designated as one of the
following order types:
(1) ``Immediate or cancel'': An order that is to be executed,
either in whole or in part, as soon as the order is received by the
electronic book, with any unexecuted balance of the order to be
immediately cancelled.
(2) ``Fill or kill'': an order that is to be executed in full as
soon as the order is received by the electronic book, but that should
be immediately cancelled if it is not executed.
[[Page 43037]]
(3) ``Cross'': An order to buy and sell the same security at a
specific price equal to or better than the NBBO and better than the
best bid and offer displayed in the electronic book. A cross order may
represent interest of one or more members of the Exchange.
(4) ``Cross with size'': An order to buy and sell at least 25,000
shares of the same security (A) at a price equal to or better than both
the NBBO and the best bid or offer displayed in the electronic book;
(B) where the size of the order is larger than the aggregate size of
all interest displayed in the electronic book at that price; and (C)
where neither side of the order is for the account of the CHX member
sending the order to the electronic book.
(c) Orders may be entered by a member on its own behalf (a
proprietary or professional order) or for the account of a customer (an
agency order). In the electronic book, however, agency orders are
subject to the same display and execution processes as professional
orders and agency orders do not receive any priority in order execution
or handling.
(d) In listed securities, an order is not eligible for execution in
the electronic book if it crosses or locks the NBBO at the time that it
is received, unless the order locks or crosses the BBO in the
electronic book. An order in a listed security that locks or crosses
the NBBO at the time it is received shall be immediately cancelled. An
order in a listed security that locks or crosses the BBO in the
electronic book shall be executed against orders in the electronic
book, as set out in Rule 4(c), below; any remaining portion of the
order shall be automatically cancelled, if it would lock or cross the
NBBO.
(e) All orders submitted to the electronic book are good for the
day on which they are submitted only and shall be automatically
cancelled at the end of each day's trading session.
Operating Hours
Rule 3.(a) The electronic book will operate during the Exchange's
Primary and Post-Primary Trading Sessions, as further described below.
(b) The electronic book will accept orders each day once the
primary market for a security opens its market on either a quote or a
trade. For purposes of this rule, the primary market in a security is,
unless otherwise designated by the Rules Subcommittee, the listing
market for a security; provided, however, that if a security is traded
by the NYSE, then the primary market for such security is the NYSE and
if a security is traded by the Amex, then the primary market for such
security is the Amex. If a security is traded on both the NYSE and the
Amex, whichever of the two is the listing market is the primary market.
If a security is listed on both the NYSE and Nasdaq, the NYSE will be
considered the primary market.
(c) The electronic book will close at 3:30 p.m. (Central Time).
(d) The electronic book will not operate during regulatory halts
called by the primary or listing market in a security, in accordance
with rules set out in the appropriate transaction reporting plans.
Additionally, the electronic book will halt its operation during
periods of market volatility following the rules in Article IX, Rule
10A.
Operation of the Electronic Book
Rule 4. (a) Routing of orders. Orders shall be routed to the
electronic book using one of the following methods:
(1) Except for the orders described in paragraph (2) below, all
orders must be sent to the electronic book through the Exchange's MAX
system or through other communications lines approved by the Exchange
for the delivery of orders by its members.
(2) ITS commitments for ITS-eligible securities traded in the
electronic book shall be sent through the ITS system. NASD market
participants shall have direct telephonic access to the supervisory
center for the Exchange's electronic book to enter orders in the
electronic book, for the securities in which those participants are
registered with NASD as market makers or as electronic communications
networks/alternative trading systems.
(b) Ranking and display of orders. All orders sent to the
electronic book shall be ranked according to their price and time of
receipt, as follows:
(1) Limit orders shall be ranked based on their limit prices and
times of receipt by the electronic book.
(2) All orders shall be immediately and publicly displayed through
the processes set out in the appropriate transaction reporting plan for
each security when they constitute the best bid or offer in the
electronic book for that security.
(c) Automated matching of orders. Orders shall automatically match
against each other, as follows:
(1) Except for ``cross with size'' transactions, which shall be
executed as described in Rule 2(b)(4), above, an incoming order shall
be matched against one or more orders in the electronic book, in the
order of their ranking, at the price of each order, for the full amount
of shares available at that price, or for the size of the incoming
order, if smaller.
(2) If an incoming order cannot be matched when it is received and
it is not designated as a type that should be immediately cancelled,
the order shall be placed in the electronic book and ranked as
described in Rule 4(b) above.
(3) An inbound ITS commitment, if it is priced at the current BBO
in the electronic book, shall be automatically matched against the
order(s) reflected in the BBO, for the full amount of shares available
at that price, and any remaining portion of the ITS commitment shall be
automatically cancelled; provided, however, that the inbound ITS
commitment shall be automatically cancelled if its execution would
occur at a price worse than the NBBO. If an inbound ITS commitment to
sell is priced, at the time it is received, lower than the best bid in
the electronic book or an ITS commitment to buy is priced, at the time
it is received, higher than the best offer in the electronic book, the
ITS commitment shall be automatically cancelled.
(4) In listed securities, orders shall only be matched at prices
that are equal to, or better than, the NBBO.
(d) Submission of cross or cross with size orders. Cross or cross
with size orders shall be automatically executed if they meet the
requirements set out in Rule 2(b)(3) and 2(b)(4) above. If an order
designated as cross or cross with size does not meet the requirements
for its designation at the time it is received by the electronic book,
it shall be immediately cancelled.
Cancellation of Transactions
Rule 5. A transaction made in demonstrable error and cancelled by
both parties may be unwound, subject to the approval of the Exchange.
Unresolved controversies relating to transactions that occur in the
electronic book, and which are not addressed pursuant to the procedures
in Rule 7, below, shall be subject to the arbitration rules of the
Exchange set out in Article VIII, Rules 23 and 24.
Registration of Market Makers
Rule 6. Upon application and approval by the Exchange, any Exchange
floor member may register as a market maker in one or more of the
securities traded in the electronic book. A market maker shall meet the
following requirements and shall have the following obligations:
(a) Registration. Applicants seeking to register as electronic book
market makers must submit an application on the form(s) required by the
Exchange.
[[Page 43038]]
The Committee on Floor Procedure shall consider each application,
considering factors including, but not limited to, an applicant's
financial and technical resources, trading experience, personnel and
disciplinary history. The Committee shall approve or disapprove each
application, providing written reasons for any disapproval. If an
application is not approved, the applicant may obtain review of the
decision by the Exchange's Executive Committee by filing a written
request for review with the Secretary of the Exchange within five
business days after being notified of the disapproval.
(b) Obligations of a market maker. Each market maker must maintain
a continuous, two-sided market in each of the securities in which he or
she is registered.
(c) Utilization of exempt credit. Exchange members registered as
electronic book market makers are registered as dealers on the Exchange
for purposes of the Securities Exchange Act of 1934 and the rules and
regulations under that Act.
(d) Suspension or termination of registration. The registration of
a market maker may be suspended or terminated by the Committee on Floor
Procedure based upon a finding that the market maker has not
satisfactorily performed his or her responsibilities as defined in the
federal securities laws and the rules of the Exchange. Proceedings to
suspend or terminate the registration of a market maker shall be
conducted in accordance with the procedures set out in Article XVII of
the Exchange's Rules.
Handling of Clearly Erroneous Transactions
Rule 7. The Exchange will respond to requests for review of clearly
erroneous transactions using the following procedures:
(a) The terms of a transaction are ``clearly erroneous'' where
there is an obvious error in any term, such as price, number of shares
or other unit of trading, or identification of the security.
(b) Any member may request a review of an execution received
through the electronic book when the member believes that the terms of
the transaction were clearly erroneous when submitted.
(1) The member must make a request for review by telephone
immediately after the execution and also must provide a written
request, by facsimile or by e-mail, within 15 minutes after the
execution.
(2) The Exchange shall promptly notify the other party to the
transaction of the request for review.
(3) The member making a request for review shall provide, within 30
minutes after making the written request for review (or within such
longer period of time specified by Exchange staff), written
documentation relating to the disputed transaction that is reasonably
necessary for use by the Exchange in resolving the matter. The other
party to the transaction shall provide, within 30 minutes after
receiving notice from the Exchange of the request for review (or within
such longer period of time specified by Exchange staff), written
documentation relating to the disputed transaction that is reasonably
necessary for use by the Exchange in resolving the matter. Once a party
has submitted its documentation, and the period for providing the
documentation has ended (or, if earlier, the party has notified the
Exchange that it has no further information), the party may not provide
additional information unless requested to do so by Exchange staff.
Either party to the transaction may request, and the Exchange shall
provide, the written documentation submitted by the other party.
(4) The Exchange, acting through one of its officers designated by
the Chief Executive Officer, shall review the transaction and determine
whether it is clearly erroneous. In making that determination, the
officer shall consider the goals of maintaining a fair and orderly
market and the protection of investors and the public interest.
(c) If the Exchange officer determines that a transaction is not
clearly erroneous, the officer shall notify both parties, in writing,
that no action will be taken with respect to the completed trade. If
the Exchange officer determines that a transaction is clearly
erroneous, the officer shall declare the transaction null and void or
modify one or more of the terms of the transaction with the aim of
trying to return the parties to the positions that they would have been
in (or to positions reasonably similar to those positions) if the error
had not occurred. The officer shall document this decision in writing
and provide copies of the decision to all parties.
(d) Either party may appeal this determination to a subcommittee of
the Exchange's Committee on Floor Procedure by submitting an appeal to
the Exchange's Secretary, by facsimile or in writing, within 30 minutes
after receiving the Exchange's written decision or, if the Exchange
notifies parties of its decision after 3:00 p.m. (Central Time), by
8:30 a.m. (Central Time), the next trading day. Once an appeal is
received, the Exchange shall notify the counterparty to the trade and
both parties and the Exchange itself will be permitted to submit any
additional supporting written materials up to the time that the
subcommittee considers the appeal. Either party to a disputed trade may
request, and the Exchange shall provide, the written documentation
presented to the subcommittee by the other party or by the Exchange. An
appeal does not operate as a stay on the decision being appealed. After
consideration of any written materials provided by the parties or by
the Exchange, and after any hearings that the subcommittee may hold,
the subcommittee, using the standards set out in this rule, shall
affirm, modify or reverse the original decision. The subcommittee's
decision on a matter may be appealed to the full Committee on Floor
Procedure as set out in CHX Article IV, Rule 3, except that the appeal
does not operate as a stay on the decision of the subcommittee. The
decision of the Exchange's Committee on Floor Procedure shall be the
final Exchange action on the matter. Any decision by an Exchange
officer under section (c) above or by the Committee on Floor Procedure
or any of its subcommittees under this section (d) shall be rendered
without prejudice as to the rights of the parties to the transaction to
submit their dispute to arbitration.
(e) If there is any disruption or malfunction in the use or
operation of the electronic book, or the communications systems
associated with the electronic book, the Chief Executive Officer, or
another officer designated by the Chief Executive Officer may declare
any transaction arising out of the use of the electronic book during
the period of the disruption or malfunction null and void or may modify
the terms of these transactions. In making this decision, the Chief
Executive Officer, or any designee, must find that the transactions
were clearly erroneous or that the actions are necessary for the
maintenance of a fair and orderly market or the protection of investors
and the public interest. Absent extraordinary circumstances, any action
by the Chief Executive Officer or other designee shall be taken within
30 minutes of detection of the erroneous transaction, but in no event
later than 2:00 p.m., Central Time, on the trading day following the
date of the trade at issue. The Exchange shall notify each member
involved in the transaction as soon as practicable following the
decision and any party to the transaction may appeal that decision by
following the procedures set out above in section (d) of this rule.
Application of CHX Rules
Rule 8. The rules and procedures in this Article shall apply to
trading conducted in the electronic book.
[[Page 43039]]
Unless otherwise defined in this Article, terms used in this Article
shall have the same meanings given them elsewhere in the Rules. Except
where the context requires otherwise, the provisions of the
Constitution and all other Rules and policies of the Board of Governors
shall continue to be applicable to trading that occurs in the
electronic book. If any rule in this Article is inconsistent with any
other provision of the Rules, the provisions of this Article shall
control and shall be deemed to supplement or amend the inconsistent
provision.
* * * * *
Article XII--Discipline and Trial Proceedings
* * * * *
Minor Rule Violations
Rule 9.
(a) No change to text.
(b) No change to text.
(c) No change to text.
(d) No change to text.
(e) No change to text.
(f) No change to text.
(g) No change to text.
(h) Exchange Rules and Policies subject to the Minor Rule Violation
Plan:
(i) Reporting and Record Retention Violations
* * * * *
(ii) Floor Decorum and Minor Trading Rule Violations
(1)-(10) No change to text.
(11) [Failure to comply with Cabinet Securities Provision (Article
XX, Rule 11)] Reserved for future use.
* * * * *
ARTICLE XX
* * * * *
[Cabinet Securities]
Rule 11. Reserved for future use. [Stocks having no designated
specialist unit of trading shall be assigned for dealings by use of
cabinets and shall be dealt in at a location designated for that
purpose.]
[The Exchange may also designate bonds which are to be dealt in by
use of cabinets.]
[Bids and offers in securities dealt in by use of cabinets shall be
written on cards, which shall be filed in the cabinets in the following
sequence:]
[1. According to price; and]
[2. According to the time received at the cabinet.]
[Orders in such securities shall be filled according to the bids
and offers filed in the cabinets, in the sequence indicated above,
except that oral bids and offers in such securities may be made if not
in conflict with bids and offers in the cabinets. Oral bids and offers
may be made by clearing the cabinet post by phone provided that such
bids and offers are audibly announced at the cabinet post through a
speaker system maintained by the Exchange.]
[Every card placed in the cabinets shall bear a definite price and
number of shares and no mark or identification shall be placed thereon
to indicate it is other than a limited order at the price.]
* * * * *
ARTICLE XXVIII--Listed Securities
* * * * *
[Cabinet System]
Rule 6. Reserved for future use. [The Board of Governors may
designate to be traded in the cabinet system those securities which in
the judgment of the Board do not trade with sufficient frequency to
warrant their retention in the specialist system and may place
securities in the cabinet system on the unrestricted list. Securities
on the unrestricted list may thereafter, until removed from the
unrestricted list, be traded off the Floor of the Exchange without
special permission from the Exchange.]
* * * * *
ARTICLE XXXIV--Registered Market Makers--Equity Floor
* * * * *
Assigned Securities
Rule 3. A registered market maker shall engage to a reasonable
degree under existing circumstances in a course of dealing in the
securities to which he is assigned that is reasonably calculated to
contribute to the maintenance of a fair and orderly market. The Floor
Procedure Committee (or other committee appointed for the purpose by
the Board) shall specify the percentage of the shares purchased and
sold by a registered market maker that must be of securities to which
he is assigned.
* * * Interpretations and Policies:
.01 No change to text.
[.02 The Committee on Floor Procedure has approved a program which
provides for the dissemination of continuous two-sided quotations by
Market Makers in those issues lacking a registered specialist (Cabinet
Issues). In discussing the implementation of the program, the Committee
recognized that definitive procedures must be set forth in order to
avoid any misunderstanding concerning this program and current Cabinet
System policy. The Committee wishes to make it clear that the program
is open to all floor members who are interested in seeing all Exchange
issues quoted. The Committee retains the right to review the program on
an ongoing basis.]
[The procedures and policies relative to this program are as
follows:]
[1. A Market Maker who agrees to disseminate a continuous two-sided
quotation in a Cabinet System Issues will be considered the ``Post'' in
the issue.]
[2. The ``Post'' classification carries with it the obligation to
accept and reflect all orders which qualify for entry on a ``Post
Protection'' basis.]
[3. The subject issues are no longer classified as Cabinet System
issues.]
[4. All current rules and policies in effect relative to clearing
the Post apply with equal force with respect to the subject issues.]
[5. Limit orders will be handled under the same guidelines which
apply to the handling of such orders by Specialists except for
application of the Best requirement which is limited to 100 shares.]
[6. The designation of ``Lead'' or ``Primary'' Market Maker will be
assigned to the first Market Maker in a given Cabinet System issue who
is willing to abide by the dictates of this program.]
[7. The Lead or Primary Market Maker, as the repository for limit
orders in the subject issues, will be responsible for lodging all
applicable Trade Through complaints against other ITS Participants.]
* * * * *
Membership Dues and Fees
A.-L. No change to text.
M. Credits
1. Specialist Credits--No change to text
2. Floor Broker Credits--No change to text.
[3. Credits for Qualified Market Makers Registered in Cabinet
Securities]
[Effective July 1, 2002, total monthly fees owed by a market maker
registered in a cabinet security will be reduced (and qualified market
makers will be paid each month for any unused credits) by a Transaction
Credit.]
[``Transaction Credit'' when used in connection with a credit for a
Qualified Market Maker registered in a cabinet security means 18% of
the monthly CHX tape revenue from the Consolidated Tape Association
(less all direct CTA costs) generated by the security in which the
market maker is registered. To the extent that CHX tape revenue is
subject to a year-end
[[Page 43040]]
adjustment, market maker credits may be adjusted accordingly.]
[``Qualified Market Maker'' means a lead market maker who is
registered as such in 100 or more cabinet securities.]
* * * * *
Minor Rule Violation Plan Recommended Fine Schedule
(Pursuant to Article XII, Rule 9(e))
* * * * *
[Failure to comply with Cabinet Securities
Provision: $100.00, $500.00, $1,000.00]
* * * * *
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. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange 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
The Exchange proposes to implement a fully-automated electronic
book for the display and execution of orders in securities that are not
assigned to a specialist. Under the Exchange's current rules,
securities that are not assigned to a specialist currently are traded
in two ways: (1) Securities can be placed in the cabinet; \4\ or (2)
securities can be removed from the cabinet and assigned to a lead
market maker for trading.\5\ According to the Exchange, the procedures
associated with the trading of these products are quite manual. For
example, the Exchange maintains a physical location, known as the
cabinet, at which written information is manually maintained regarding
existing bids, offers and orders for each cabinet security. These
orders are filled manually and each transaction is recorded on a
written trade ticket before being entered into the Exchange's systems
for public dissemination. Securities that are assigned to lead market
makers are subject to similar manual procedures, quite like those for
cabinet securities, except that these orders are also entered into the
Exchange's systems so that they can be automatically quoted.
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\4\ See CHX Article XX, Rule 11.
\5\ See CHX Article XXXIV, Rule 3, Interpretation and Policy
.02. Among other things, market makers assigned to these former
cabinet securities are required to engage, to a reasonable degree
under existing circumstances, in a course of dealing that is
reasonably calculated to contribute to the maintenance of a fair and
orderly market.
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The Exchange believes that these antiquated manual procedures are
an extraordinarily inefficient way to trade securities that are not
assigned to a specialist. As a result, the Exchange now proposes to
replace these procedures with a new fully-automated electronic book
that would display and match eligible limit orders in these securities,
without the participation of a specialist or lead market maker. As
described below, this new electronic book would allow the Exchange's
members, whether or not they are on the Exchange's floor, to enter
orders into an automated matching system operated by the Exchange for
possible execution.
Eligible securities and eligible orders. Under the proposed rules,
all securities eligible for trading on the Exchange that are not
assigned to a specialist would be traded in the electronic book. Orders
sent to the electronic book would be required to be specifically
designated for handling in the electronic book.\6\ The electronic book
would accept only round-lot limit orders that are good for the day on
which they are submitted.\7\ No odd-lot orders or good-till-cancelled
orders would be accepted.
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\6\ See Proposed CHX Article XXA, Rule 2 (requiring orders to be
specifically designated, in the manner specified by the Exchange, to
confirm that they are eligible for trading in the electronic book).
\7\ See Proposed CHX Article XXA, Rule 2.
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Orders could be designated as ``immediate or cancel'' or ``fill or
kill'' orders to ensure that they are immediately filled or
cancelled.\8\ Orders could also be designated as ``cross'' or ``cross
with size'' to permit the handling of orders to buy and sell the same
security.\9\ Orders could not be designated with any other conditions.
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\8\ An immediate or cancel order would be executed, in whole or
in part, as soon as it is received by the electronic book; if
execution is not possible, or if only a partial execution is
possible, any unexecuted balance of the order would be immediately
cancelled. A fill or kill order would be executed in full as soon as
it is received; if execution is not possible, the entire order would
be immediately cancelled. See Proposed CHX Article XXA, Rule 2(b)(1)
and (2).
\9\ A ``cross'' order would be an order to buy and sell the same
security at a specific price that is equal to or better than the
National Best Bid or Offer (``NBBO'') and better than the best bid
and offer displayed in the electronic book. A ``cross with size''
order would be an order to buy and sell at least 25,000 shares of
the same security (a) at a price equal to or better than both the
NBBO and the best bid or offer (``BBO'') displayed in the electronic
book; (b) where the size of the order is larger than the aggregate
size of all interest displayed in the electronic book at that price;
and (c) where neither side of the order is for the account of the
CHX member sending the order to the electronic book. These
definitions are substantially similar to the descriptions of the
types of cross transactions that can occur today on the Exchange's
floor without interference from the trading crowd. See CHX Article
XX, Rule 23. Because there would not be a trading crowd operating in
connection with the electronic book, however, the Exchange has not
incorporated other aspects of its existing crossing rules, such as
the requirement for asking the crowd for a market before executing a
crossing transaction between the quoted market. Similarly, because
there would not be a trading crowd or specialist's post in these
issues, the Exchange has not incorporated rules relating to
instances where a specialist or other floor member can break up the
crossing transaction by providing an improved price to one side of
the proposed trade. In the electronic book, all bids and offers
would be reflected in the book itself--there would be no on-floor
auction market trading in these issues.
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In addition, otherwise eligible orders would be cancelled in
certain circumstances, to ensure compliance with applicable intermarket
trading rules. For example, if an order in a listed security crosses or
locks the NBBO at the time that it is received, the order would be
immediately cancelled to ensure compliance with the Intermarket Trading
System (``ITS'') Plan's rules relating to locked markets.\10\
Operating hours. Under the proposed rules, the electronic book
would operate during the Exchange's Primary Trading Session and its
Post-Primary Trading Session.\11\ Specifically, the electronic book
would accept orders on each day for a particular security once the
primary market in that security opens on a quote or a trade.\12\ The
electronic book would close at 3:30 p.m. (central
[[Page 43041]]
time), and all unexecuted orders would be automatically cancelled.
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\10\ Similarly, if an order in a listed security locks or
crosses the BBO in the electronic book at the time it is received,
but not the NBBO, the order would be executed according to the
electronic book's matching algorithm, and any remaining portion
would be immediately cancelled, if it would lock or cross the NBBO.
\11\ The Exchange's Primary Trading Session is open, for a
particular security, during the same times that such security is
traded on its primary market (e.g., 8:30 to 3 p.m. central time, for
most securities). The Exchange's Post-Primary Trading Session
operates until 3:30 p.m. See CHX Article IX, Rule 10(b).
\12\ The proposed rules define the primary market as the listing
market for a security, unless otherwise designated by the Rules
Subcommittee; provided, however, that if a security is traded by the
New York Stock Exchange, Inc. (``NYSE''), then the primary market
for such security would be the NYSE and if a security is traded by
the American Stock Exchange LLC (``Amex''), then the primary market
for such security would be the Amex. If a security is traded on both
the NYSE and the Amex, whichever of the two is the listing market
would be considered the primary market. If a security is listed on
both the NYSE and The Nasdaq Stock Market, Inc. (``Nasdaq''), the
NYSE would be considered the primary market. See Proposed CHX
Article XXA, Rule 3(b).
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Routing of orders. Orders could be sent to the electronic book
through the Exchange's MAX system or through any other communications
lines approved by the Exchange for the delivery of orders by Exchange
members.\13\ The Exchange anticipates that all CHX members--whether
they are located on the Exchange's trading floor or off the floor--
would be able to receive access to the electronic book. The electronic
book would also accept and automatically execute commitments sent by
market centers that participate in the ITS. National Association of
Securities Dealers, Inc. (``NASD'') market participants would have
direct telephone access to the supervisory center for the electronic
book to enter orders, as required by the OTC/UTP Plan.\14\
Ranking and display of orders. All orders received by the
electronic book would be ranked according to their price and time of
receipt and would be displayed to the public when they constitute the
BBO in the electronic book for a security.\15\ The Exchange initially
plans to disseminate these best bids and offers through the systems
used for that purpose today--through the CTA/CQ Plan for listed
securities, and through the OTC/UTP Plan for Nasdaq/NM securities.
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\13\ See Proposed CHX Article XXA, Rule 4(a)(1).
\14\ See CHX Article XX, Rule 43.
\15\ See CHX Proposed Article XXA, Rule 4(b).
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Automated matching of orders. In the electronic book, orders would
automatically match against each other, in price/time priority.\16\
Specifically, an incoming order would be matched against one or more
orders in the electronic book, in the order of their ranking, at the
price of each order, for the full amount of shares available at that
price, or for the size of the incoming order, if smaller. If an
incoming order could not be matched when it is received, and it is not
designated as an order that should be immediately cancelled, the order
would be placed in the electronic book. For example:
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\16\ The only exception to this price/time priority matching
would occur when certain ``cross with size'' orders are executed. In
those instances, eligible ``cross with size'' transactions--where
there is an order to buy and sell at least 25,000 shares of the same
security (A) at a price equal to or better than both the NBBO and
the BBO displayed in the electronic book; (B) where the size of the
order is larger than the aggregate size of all interest displayed in
the electronic book at that price; and (C) where neither side of the
order is for the account of the CHX member sending the order to the
electronic book--could execute at the price of orders in the
electronic book, without executing those earlier-received orders.
Because this type of crossing transaction is permitted on the floor
of the Exchange today, the Exchange believes it is appropriate to
include this transaction type in the fully-automated electronic
book.
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Assume that the electronic book contains the following bids and
offers in a particular security, FAA:
----------------------------------------------------------------------------------------------------------------
Buy Price Price Sell
----------------------------------------------------------------------------------------------------------------
200............................................................. $47.50 $48.20 400
1,500........................................................... 47.00 48.50 700
600............................................................. 46.75 49.00 100
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--An incoming limit order to buy 500 shares at a price of $48.00 would become the top-of-the-book best bid......
--An incoming limit order to buy 500 shares at a price of $48.20 would match for 400 shares against the top-of-
the-book best offer at a price of $48.200, leaving 100 shares to buy at $48.20.................................
--Similarly, an incoming limit order to buy 500 shares at a price of $48.50 would match for 400 shares against
the top-of-the-book best offer at a price of $48.20 and would match for 100 shares at a price of $48.50........
----------------------------------------------------------------------------------------------------------------
Inbound ITS commitments would be automatically matched against the
order(s) reflected in the electronic book's BBO for the full amount of
shares at that price, and any remaining portion of the ITS commitment
would be automatically cancelled. An ITS commitment, however, would be
automatically cancelled if its execution would occur at a price worse
than the NBBO or if it is hypermarketable at the time it is
received.\17\ Importantly, to ensure that the electronic book does not
trade through another market in violation of the ITS Plan's trade-
through provisions, orders in listed securities would only be matched
at prices that are equal to, or better than, the NBBO.
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\17\ In other words, if an inbound ITS commitment to sell is
priced, at the time it is received, lower than the best bid in the
electronic book, or an ITS commitment to buy is priced, at the time
it is received, higher than the best offer in the electronic book,
the ITS commitment would be automatically cancelled.
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Cross or cross with size orders would be automatically executed if
they meet the requirements for those types of orders. If they do not
meet applicable requirements, they would be immediately cancelled.
No distinction between agency and professional orders. Under the
proposed rules, agency orders (entered on behalf of a customer) and
professional or proprietary orders (entered for the account of a CHX
member or other broker-dealer) would be handled in an identical way in
the electronic book's matching algorithms.\18\
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\18\ The Exchange believes that this handling is appropriate
because the electronic book is a fully-automated functionality of
the Exchange. Orders for the electronic book would be submitted
directly and electronically to the Exchange. Once transmitted, an
order could be cancelled, but a member could not influence the
execution of that order in any way. The orders would enter a line of
other orders to be matched against one another based on an
established algorithm.
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Cancellations of transactions and handling of clearly erroneous
transactions. Under the proposed rules, members that make a transaction
in demonstrable error could agree to cancel and unwind the transaction,
subject to the approval of the Exchange.\19\ For purposes of the
electronic book, the Exchange also proposes to adopt a policy for the
handling of clearly erroneous transactions.\20\ This policy would allow
the Exchange to (a) review, and potentially modify or cancel,
executions where one party believes that the terms of the transaction
were clearly erroneous when submitted; and (b) modify or cancel
executions that result from a disruption or malfunction in the use or
operation of the electronic book, or any communications system
associated with the electronic book. The proposed rules set out
procedures for each of these reviews, including specific means for
members to appeal the Exchange's decisions.\21\
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\19\ See Proposed CHX Article XXA, Rule 5.
\20\ See Proposed CHX Article XXA, Rule 7.
\21\ For example, a member seeking review of a ``clearly
erroneous'' transaction would be required to notify the Exchange of
the request, by telephone and in writing, promptly after the
execution. After reviewing the transaction, an Exchange official
would notify both parties of his or her decision, in writing; either
party could appeal the decision to a subcommittee of the Exchange's
Committee on Floor Procedure and, if not satisfied, to the full
Committee on Floor Procedure. In making his or her decision, the
Exchange official would consider the goals of maintaining a fair and
orderly market and protecting investors and the public interest. If
an Exchange official determines that a transaction was clearly
erroneous, he or she would try to return the parties to the
positions that they would have been in (or positions reasonably
similar to those positions) if the error had not occurred.
Similarly, in the event of disruption or malfunction that impacts
the operation or use of the electronic book, an Exchange official
could act promptly to declare transactions void or to modify
transactions. The official would be required to notify each member
involved in the transaction as soon as practicable after making any
decision. Decisions could be appealed using the procedure set out
for the review of decisions addressing clearly erroneous
transactions.
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[[Page 43042]]
Registration of market makers. Under the proposal, Exchange members
could seek registration as market makers in one or more of the
securities traded in the electronic book. A market maker would be
required to maintain a continuous two-sided market in each security in
which he or she is registered and would be entitled to utilize exempt
credit for financing their market maker transactions. The proposed
rules would set out a process for market makers to apply for this
registration and for the suspension or termination of their
registrations, where appropriate.\22\
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\22\ See Proposed CHX Article XXA, Rules 6(a) and (d).
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Additional changes to rules. Because this proposal is designed to
replace the Exchange's existing cabinet security and lead market maker
systems, this submission also contains proposed changes to various
rules associated with those trading systems.\23\
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\23\ See proposed changes to CHX Article XII, Rule 9 (deleting
the cabinet securities rule from the Minor Rule Violation Plan
(``MRVP'')); CHX Article XX, Rule 11 (deleting the cabinet
securities rule); CHX Article XXVIII, Rule 6 (deleting the rule
permitting the Board of Governors to place securities in the
cabinet); CHX Article XXXIV, Rule 3 (deleting the interpretation
that creates the lead market maker program); and Schedule of
Membership Dues and Fees (deleting the lead market maker credits and
the recommended MRVP fines for violations of the cabinet system
rule).
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The Exchange represents that it has designed this electronic book
to be a fully-automated system that would permit eligible orders in
eligible securities to match against one another, without the required
participation of a specialist or lead market maker. The Exchange
believes that this system functionality would provide all Exchange
members with an efficient way to trade securities that are not assigned
to a specialist and would protect investors and the public interest by
automatically handling orders in a fair and reasonable manner.
2. Statutory Basis
The Exchange believes that the proposed rule change, as amended, is
consistent with Section 6(b) of the Act \24\ in general, and furthers
the objectives of Section 6(b)(5) of the Act \25\ in particular,
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 a national market system, and, in general, to protect
investors and the public interest.
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\24\ 15 U.S.C. 78(f)(b).
\25\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change, as
amended, will impose any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change, as amended.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this 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 Exchange consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. 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. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-CHX-2004-11 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-CHX-2004-11. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 in the Commission's Public Reference Section, 450 Fifth Street,
NW., Washington, DC 20549. Copies of such filing also will be available
for inspection and copying at the principal office of the CHX. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-CHX-2004-11 and should be
submitted on or before August 9, 2004.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-16322 Filed 7-16-04; 8:45 am]
BILLING CODE 8010-01-P