Self-Regulatory Organizations; Notice of Amendment Nos. 1, 2, 3 and 4 to Proposed Rule Change by Chicago Stock Exchange, Inc. Relating to the Creation of the Chicago Match System

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34469; File No. SR-CHX-93-19]

Self-Regulatory Organizations; Notice of Amendment Nos. 1, 2, 3

and 4 to Proposed Rule Change by Chicago Stock Exchange, Inc. Relating

to the Creation of the Chicago Match System

August 1, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on April 4,

1994, May 4, 1994, June 7, 1994 and July 12, 1994, the Chicago Stock

Exchange, Inc. (``CHX'') filed with the Securities and Exchange

Commission (``Commission'') Amendment Nos. 1, 2, 3 and 4 to a proposed

rule change\1\ as described in Items I, II and III below, which items

have been prepared by the self-regulatory organization.\2\ The

Commission is publishing this notice to solicit comments on Amendment

Nos. 1, 2, 3 and 4 to the proposed rule change from interested persons.

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\1\File No. SR-CHX-93-19. The proposed rule change was

originally filed on August 6, 1993, and was published for comment in

Securities Exchange Act Release No. 33542 (January 28, 1994), 59 FR

5451.

\2\See Letter Amendment No. 1 to SR-CHX-93-19, from David T.

Rusoff, Attorney, Foley & Lardner to Sandy Sciole, Special Counsel,

Division of Market Regulation, Commission, dated March 29, 1994;

Letter Amendment No. 2 to SR-CHX-93-19, from David T. Rusoff,

Attorney, Foley & Lardner to Sharon M. Lawson, Assistant Director,

Division of Market Regulation, dated May 4, 1994; Letter Amendment

No. 3 to SR-CHX-93-19, from David T. Rusoff, Attorney, Foley &

Lardner to Sharon M. Lawson, Assistant Director, Division of Market

Regulation, dated June 7, 1994, and Amendment No. 4 to SR-CHX-93-19,

dated July 11, 1994.

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I. Self-Regulatory Organization's Statement of the Terms of

Substance of the Proposed Rule Change

Pursuant to Section 19(b)(1) of the Act, the Chicago Stock Exchange

is amending the rules for its institutional matching system, the

Chicago Match (formerly known as the Match Market Exchange Facility).

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 self-regulatory organization

included statements concerning the purpose of, and basis for, the

proposed rule change and discussed any comments it received on the

proposed rule change. The text of these statements may be examined at

the places specified in Item IV below. The self-regulatory organization

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 CHX submitted to the Commission Amendment Nos. 1, 2, 3 and 4 to

request that the Commission amend its proposed rules relating to the

proposed Chicago Match System (``Chicago Match'').

The purpose of Amendment No. 4 is to further amend the proposed

rules relating to the Chicago Match by (i) changing the cross price of

the match to the mid-point between the consolidated best bid and offer

regardless of the size of the spread; (ii) reporting to the

consolidated tape or NASDAQ the cross price plus or minus the average

liquidity fee for each stock stated in 256ths; (iii) limiting the

maximum liquidity fee or liquidity credit (received or paid) to \1/2\

of the spread of the consolidated best bid and offer at cross time

(regardless of the size of the spread); and (iv) not permitting orders

to sell short to be entered with a liquidity fee.

As stated above, this amendment changes the proposed cross price

for the Chicago Match. As initially proposed, all matched orders will

be executed at a random time within a pre-determined ten minute window

period at the market price at such time. The market price will still be

calculated based upon the spread of a particular issue. However, rather

than changing the price depending on whether there is a \1/8\, \1/4\,

\3/8\, etc. spread and determining whether there is an order imbalance,

Amendment No. 4 proposes to have the Chicago Match calculate the market

price as the mid-point between the consolidated best bid and offer

regardless of the size of the spread. For example, if the consolidated

best bid and best offer for stock X was 20-20 \1/8\, the cross price

would be 20\1/16\.

As a result of the above change, Amendment No. 4 also changes the

way trades in the Chicago Match are reported to the Consolidated Tape

or NASDAQ. As proposed, the Exchange will report one trade for each

stock executed in the Chicago Match. That trade report will include the

total number of shares executed in that stock and a price equal to the

cross price plus (or minus) the volume weighted average of liquidity

fees paid (or liquidity credits received) for that stock.

Also as a result of the above change to the cross price, limited

price orders, orders with a liquidity fee or credit entered in cents,

and orders that are entered with a liquidity fee or credit relative to

the consolidated best bid or offer or as a computed quantity (in

addition to liquidity fees or credits entered in cents) will be

eligible to be displayed orders. The Exchange will assign numeric

values to these orders based on the then current consolidated best bid

and offer. It is anticipated that initially the Exchange will update

this information at least every 15 minutes or such less time that is

possible.

In addition to the above changes, Amendment No. 4 changes how

orders in a specialist's book interact with the Chicago Match and

limits the maximum size of liquidity fees and credits. As before, the

CHX's CQS quotation will automatically be fed into the Chicago Match

facility on a real-time basis. These bids and/or offers will be entered

as an order in Chicago Match. Rather than limiting interaction with the

book to \1/8\ spread issues however, the revised rules would enter the

CHX CQS quotation into the match in all issues. If entered, these

orders will have the highest priority of execution at that liquidity

credit level.

As stated above, the Chicago Match will limit the maximum size of

liquidity fees and liquidity credits. With respect to the limitation of

the size of liquidity fees, if a liquidity fee is greater than \1/2\ of

the spread of the Consolidated Best Bid and Offer at cross time it will

be reduced to \1/2\ of the spread at cross time. For example, if \1/2\

of the spread is 6\1/4\ cents, and an order with a liquidity fee of 10

cents entered, the maximum liquidity fee that order can pay is 6\1/4\

cents. Liquidity credits, on the other hand, will be treated

differently than liquidity fees. For liquidity credits, the Chicago

Match will not permit liquidity credits to be received in an amount

greater than \1/2\ of the spread of the Consolidated Best Bid and

Offer. For example, if the spread of the Consolidated Best Bid and

Offer at cross time was \1/2\, the maximum liquidity credit allowed

would be 25 cents.\3\ If an order was entered with a liquidity credit

greater than 25 cents, the user would have an option of either having

the liquidity credit reduced to the Consolidated Best Bid and Offer or

having the order be excluded from the match.

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\3\This would be \1/2\ of the \1/2\ spread or \1/4\ which is 25

cents.

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The final change proposed by this amendment concerns short sales.

In order to ensure that any order to sell short can have no market

impact and not contribute to a volume weighted average liquidity fee

that is less than the middle of the spread, no order to sell short will

be permitted to be executed if it includes a liquidity fee. Liquidity

credits, however, will be allowed.

In addition to the amendments submitted in Amendment No. 4, the

Exchange also made changes to the Chicago Match Rules in Amendment Nos.

1, 2 and 3. Amendment No. 1 changed the name of this proposed system

from ``Match Market Exchange'' (``MMX'') to ``Chicago Match''.

Amendment No. 1 changed the definition of size conditions (in Rule

2(ab)) to be considered for a near match to be a specific number

entered by the User instead of the former procedure of designating the

size conditions as ``small,'' ``medium,'' and ``large.'' Amendment No.

1 required that liquidity fees and credits be entered in cents and

entered relative to the Consolidated Best Bid and Offer at cross time

or entered as a computed quantity (in Rule 6(e)(9)). Amendment No. 1

also made technical changes and corrections that do not affect the

substance of the proposal and made other substantive changes that

subsequently were amended.

Amendment No. 2 changed the definition of ``Near Match'' (in Rule

2(w)) to clarify that it means two orders for a particular security in

which (i) the number of shares of each order equals or exceeds the

minimum size specified by the other order; and (ii) the Liquidity

Credit required by one side is greater than the Liquidity Fee offered

by the other side. Amendment No. 2 clarified the meaning and intent of

proposed Rule 6(e)(8) which permits a user to enter another user's name

in order to prevent any matches between those two users, thereby

excluding certain users when necessary to comply with ERISA. Amendment

No. 2 also clarified the meaning and intent of proposed Rule 6(e)(7)

which permits a user to exclude an entire category of contra parties.

Amendment No. 2 further clarified that Conditional Orders may not be

Displayed Orders and that all confirmations will comply with the

requirements of Rule 10b-10 under the Act; and it noted that non-member

users will be required to have $10 million for investment purposes.

Amendment No. 3 amended Rule 3 to delete references to the Exchange

permitting orders for securities that are not listed or admitted to

unlisted trading privileges on the Exchange to be entered into the

Chicago Match System. Amendment No. 3 also made substantive changes to

proposed Rule 9(b) (which attempted to eliminate any argument that

trades executed in the Chicago Match could trade through other market's

published quotations) which were subsequently amended in Amendment No.

4.

2. Basis

The proposed rule change is consistent with Section 6(b)(5) of the

Securities Exchange Act of 1934 in that it is designed to promote just

and equitable principles of trade and to protect investors and the

public interest.

(B) Self-Regulatory Organization's Statement on Burden on Competition.

The Exchange believes that no burden will be placed on competition

as a result of the proposed rule change.

(C) Self-Regulatory Organization's Statement on Comments on the

Proposed Rule Change Received From Members, Participants or Others

No comments were solicited or received.

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 self-regulatory organization 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. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 fifth Street, NW., Washington DC 20549. Copies

of the submissions, 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. Sec. 552, will be available for inspection and copying at

the principal office of the above-referenced self-regulatory

organization. All submissions should refer to File No. SR-CHX-93-19 and

should be submitted by August 22, 1994.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-19157 Filed 8-4-94; 8:45 am]

BILLING CODE 8010-01-M