[Federal Register Volume 75, Number 246 (Thursday, December 23, 2010)]
[Notices]
[Pages 80870-80872]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-32223]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63564; File No. SR-CHX-2010-25]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Notice of Filing and Order Granting Accelerated Approval of a Proposed
Rule Change To Eliminate the Validated Cross Trade Entry Functionality
December 16, 2010.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on December 10, 2010, the Chicago Stock Exchange, Inc. (the
``Exchange'' or ``CHX'') filed with the Securities and Exchange
Commission (the ``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 is approving the proposed rule change on an accelerated basis.
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\1\ 15 U.S.C.78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The CHX proposes to amend its rules to eliminate the Validated
Cross Trade Entry Functionality for Exchange-registered Institutional
Brokers. The text of this proposed rule change is available on the
Exchange's Web site at (http://www.chx.com) and in the Commission's
Public Reference Room.
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 CHX included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received regarding the proposal. The text of
these statements may be examined at the places specified in Item IV
below. The CHX 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 amend its rules relating to the submission
and execution of certain cross orders by CHX-registered Institutional
Brokers (``Institutional Brokers'') by eliminating the ability of an
Institutional Broker to execute trades on the Exchange's trading
facilities outside of the Exchange's Matching System.\4\ Institutional
Brokers represent a voluntary registration category of Exchange
Participants and the provisions of Article 17 of the Exchange's Rules
apply specifically to them. Institutional Brokers are deemed to be
trading on the facilities of the Exchange.\5\ Institutional Brokers are
the successors to the previous Floor Broker category and they largely
handle orders from their customers on a manual basis.\6\
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\4\ See, Article 20 for rules relating to the operation of the
CHX Matching System.
\5\ See, Securities Exchange Act Rel. No. 54550 (Sept. 29,
2006), 71 FR 59563 (October 10, 2006) (SR-CHX-2006-05) at Section
II.C. (Institutional Broker), note 65 and accompanying text.
\6\ For example, an Institutional Broker Representative
(``IBR'') may receive an order instruction from a customer over the
telephone or some electronic means of communication (e.g., e-mail or
instant message). The IBR is then responsible for entering the terms
of the order into an electronic database (for the purpose of
facilitating automated surveillance of such activity. See, Article
11, Rule 3) and seeking execution thereof.
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With the adoption and implementation of Regulation NMS (``Reg
NMS''), the Exchange transitioned from its traditional floor-based,
auction trading archetype to its current electronic trading model.\7\
In order to facilitate the handling and execution of orders by
Institutional Brokers, Article 17 has provided a means by which
Institutional Brokers could attempt to manually execute and report
transactions outside the CHX Matching System while complying with the
trade-through prohibitions of Reg NMS and the order priority rules of
the
[[Page 80871]]
Exchange.\8\ The Exchange's Brokerplex order entry system, which is
available for use by all Institutional Brokers, includes a
functionality known as ``Validated Cross.'' The Validated Cross
functionality allows an Institutional Broker to electronically validate
whether a proposed cross transaction would constitute an improper
trade-through under Reg NMS and/or violate the Exchange's priority
rules before the trade can be consummated and reported. The purpose of
the Validated Cross functionality has been to permit an Institutional
Broker to receive an execution instruction from a customer, to
immediately validate it within Brokerplex for compliance with
applicable regulations and complete the full transaction reporting
within a timeframe which is consistent with industry standards. By
using this functionality, the broker and its customers could avoid
being disadvantaged simply because the IBR was not able to type the
trade data into the system before the National Best Bid or Offer
(``NBBO'') and/or CHX order book changed.
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\7\ See, Securities Exchange Act Rel. No. 54550 (Sept. 29,
2006), 71 FR 59563 (October 10, 2006) (SR-CHX-2006-05).
\8\ See, Reg NMS Rule 611 (Order Protection Rule); Article 20,
Rule 8 (Operation of the Matching System).
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Despite these apparent advantages, reliance on and usage of the
Validated Cross functionality by Institutional Brokers has declined
over time. Additionally, the Exchange has conducted an analysis of
whether the Validated Cross allows Institutional Broker to submit
trades which would be blocked if submitted as a regular cross order and
has concluded that the Validated Cross is effective for that purpose
only in a very small percentage of instances. Even though we are
proposing to get rid of the Validated Cross functionality,
Institutional Brokers will continue to have the ability to submit other
cross orders to the CHX Matching System for execution. Given the
additional systems and regulatory costs to maintaining the Validated
Cross functionality, the Exchange is proposing to eliminate it within
the Brokerplex trading application and delete the associated rule text.
Since the Validated Cross was the only means by which an Institutional
Broker could execute and report a trade on our facilities outside of
the Matching System, the Exchange is also proposing to eliminate the
clause in section (a) of Article 9, Rule 13 which referred to trades
executed outside the Matching System by an Institutional Broker.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act in general,\9\ and furthers the objectives
of Section 6(b)(5) in particular,\10\ in that it is designed to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transaction in
securities, to remove impediments and perfect the mechanisms of a free
and open market, and, in general, to protect investors and the public
interest. The elimination of the Validated Cross functionality
available to Institutional Brokers will simplify the order entry
process, eliminate certain regulatory concerns presented by the
Validated Cross and reduce the burden on the Exchange to maintain
overlapping order entry functionality.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement of Burden on Competition
The Exchange does not believe that the proposed rule change 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 Regarding the
Proposed Rule Change Received From Members, Participants, or Others
No written comments were solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 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 self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove 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-2010-25 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CHX-2010-25. 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 Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. 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 publicly available. All
submissions should refer to File Number SR-CHX-2010-25 and should be
submitted on or before January 13, 2011.
V. Commission's Findings and Order Granting Accelerated Approval of the
Proposed Rule Change
After careful consideration, 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.\11\ In
[[Page 80872]]
particular, the Commission finds that the proposed rule change is
consistent with the requirements of Section 6(b)(5) of the Act,\12\
which requires, among other things, that the Exchange's rules be
designed 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.
The Commission agrees with the Exchange that the elimination of the
Validated Cross functionality will simplify CHX's order entry process,
eliminate certain regulatory concerns presented by the Validated Cross
functionality, and reduce the burden on the Exchange to maintain
overlapping order entry functionality.\13\
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\11\ In approving the proposed rule change, the Commission notes
that it has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\12\ 15 U.S.C. 78f(b)(5).
\13\ See supra Section II.A.2.
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The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act,\14\ for approving the proposed rule change prior to the 30th
day after publication of notice in the Federal Register. The Exchange
represents that accelerated approval will allow the Exchange to
implement these changes prior to the application of its customary end-
of-the-year software change freeze, and thereby minimize the systems
and operational risks it says are inherent to coding changes made late
in the year. Further, accelerated approval of the proposed rule change
will allow the Exchange to more quickly address certain regulatory
concerns associated with the Validated Cross functionality.
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\14\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\15\ that the proposed rule change (SR-CHX-2010-25) be, and it
hereby is, approved on an accelerated basis.
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\15\ 15 U.S.C.78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-32223 Filed 12-22-10; 8:45 am]
BILLING CODE 8011-01-P