# Self-Regulatory Organizations; Proposed Rule Change by Chicago Stock Exchange, Incorporated Proposing to Establish Rules for an Institutional Trading System, Called the Match Market Exchange Facility > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A94-2579 ## Record - **Collection:** Federal Register - **Document type:** Uncategorized Document - **Published:** February 4, 1994 ## Text SECURITIES AND EXCHANGE COMMISSION [Release No. 34-33542; File No. SR-CHX-93-19] Self-Regulatory Organizations; Proposed Rule Change by Chicago Stock Exchange, Incorporated Proposing to Establish Rules for an Institutional Trading System, Called the Match Market Exchange Facility January 28, 1994. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ notice is hereby given that on August 6, 1993, 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 self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\15 U.S.C. 78s(b)(1) (1988). --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The CHX proposes to establish rules for an institutional trading system, the Match Market Exchange (``MMX'') facility, that integrates an electronic order match system with a facility for brokering trades. 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 section (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 purpose of the proposed rule change is to establish rules for the MMX facility, an institutional trading system that integrates an electronic order match system with a facility for brokering trades. The MMX facility is designed to combine the advantages of current institutional order systems with the advantages of exchange trading. Although the MMX will be operated by the Exchange, it was jointly developed by the CHX and Global Trade, Inc. Users of the MMX will include institutional customers, specialists, MMX market makers and brokers. These users will communicate with the MMX facility through personal computers and modems. The MMX facility will electronically match users' orders in an allocation procedure described more fully below. If an electronic match occurs, the trade will be priced at the market price at a random time within a pre-determined ten minute window period and will be executed at that time. If a match does not occur, users will still have the opportunity to find the other side of their trades through participating brokers. 2. Description of How the MMX Facility Operates The following is a brief overview of the MMX facility, followed by a more detailed description about certain aspects of the system. MMX will permit direct order entry by both CHX members and customers of those members. Prior to the time a non-member user enters orders into the system, the user will enter into an agreement with CHX agreeing to be bound by the Exchange's rules governing MMX and will submit the names of the Midwest Clearing Corporation members through which the user will clear. In order for the non-member user to designate a clearing firm, it must enter into a give-up agreement with the clearing firm and provide a copy to the Exchange. CHX member users will clear MMX transactions through their existing clearing arrangements. For each order, the user will enter the following information: Stock ticker symbol; The number of shares; Capacity (buy, sell or sell short); The limit price (optional); Linked order conditions (optional); Minimum trade size (optional); Excluded category of contra parties (optional); Names of individual excluded users (optional); Liquidity fee or credit (optional); Near match range and near match broker (optional); Order visibility; and Clearing firm. The user will send this information via modem to the MMX during the Pre-Cross Period. During this time users can review, edit or cancel their orders. In addition to orders manually entered by users, MMX will include guarantees by MMX market makers. These market makers will be Exchange members who register with the Exchange to be MMX market makers. As such, they will be obligated to guarantee a maximum execution size to all users of the system. It is currently anticipated that the maximum size of the guarantee will be ten thousand shares per issue for a certain class of stocks, five thousand shares per issue for another class of stocks, and two thousand shares per issue for a third class of stocks. MMX market maker guarantees will automatically be entered at the beginning of the Pre-Cross Period and will include a default liquidity fee or credit to be associated with a specific MMX guarantee. (Liquidity fees and liquidity credits are discussed below.) MMX market makers can improve this liquidity fee or credit and increase the size of their guarantee during the Pre-Cross Period. Users other than MMX market makers will have the option of having their orders displayed to other users of MMX. If a non-market maker user elects to have its order displayed, the order will be displayed under certain circumstances. Users will be charged lower fees for using the MMX Facility if they agree to have their orders displayed. Finally, the CHX's CQS quotation will automatically be fed into the MMX Facility on a real-time basis. When the consolidated best bid and offer spread of an issue is 1/8, the MMX Facility will look at the CHX quote to determine whether there are orders which would be executed if a trade took place at the consolidated best bid or best offer (i.e., if the CHX quote equaled the consolidated quote). If so, this bid and/or offer will be entered as an order in MMX. If entered, these orders will have the highest priority of execution. 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 be calculated based upon the spread of a particular issue. In issues where the spread in the consolidated best bid and offer is \1/4\ or other even fraction point spread, the cross will be priced at the middle of the spread. In issues with a consolidated best bid and offer spread of \3/8\ or other odd fraction (other than \1/8\), the price will be at the \1/8\ closest to the last sale. In issues with a consolidated best bid and offer of \1/8\, if there are more shares offered for sale in the MMX Facility (excluding the MMX market maker guarantee), then the \1/8\ spread issues will cross at the bid. If, however, there are more bids than offers in the MMX facility, then the \1/8\ spread issues will be crossed at the offer price. In the event that there are an equal number of shares on both sides of the CHX quotation, the cross will execute at the offer. Executions in MMX will be limited to those equity securities that are either listed or admitted to unlisted trading privileges (``UTP'') on the CHX. Users may, however, enter orders for securities in which the Exchange does not have UTP; if a match is found in these securities, the cross will not be executed in MMX. Instead, these orders will be delivered to a broker-dealer who is eligible to execute the cross in the market in which it is traded. Those orders that have been executed in the cross will be immediately transmitted by MMX to the Exchange for recordation and reporting to the Consolidated Tape. Trades will then be cleared by the designated clearing firm. After receiving an execution report (described below), institutions will then be able to reallocate trades to different clearing brokers, if desired. Immediately after the cross, users will be notified if their orders have been executed. If an order was not executed, the user may receive an administrative message (depending on the ``near match'' parameters they have specified) asking whether the user wants a broker to call it to negotiate a trade with another user that has entered similar ``near match'' parameters. 3. Unique Aspects of the MMX Facility The most fundamental feature of the MMX facility is the use of liquidity fees and liquidity credits to determine the level of priority for order matching. Rather than matching orders on the basis of time priority, the MMX facility provides incentives to those users that provide liquidity to the system. The size of the liquidity fee or credit determines the level of priority for order matching, with those users that are willing to pay the highest liquidity fee having the highest execution priority (except for orders that are part of the CHX quote) and those users desiring to be paid for providing liquidity (i.e., orders with a liquidity credit) having the lowest execution priority. Liquidity fees and credits will only be paid when an order with a liquidity fee is matched with an order with a liquidity credit. When that happens, a liquidity fee that is equal to the size of the liquidity credit will be paid. In all other cases, no liquidity fees will be paid. In order to provide executions that are equitable, immediately prior to the match, all orders for a security are first sorted into groups and then each group is prioritized for execution. Except for orders that are part of CHX's quote, which will be placed in one group and will receive the highest priority for execution, a group will consist of either all buy orders or all sell orders in a security that have the same liquidity fee or credit. Groups will be prioritized by liquidity fee or credit (as stated earlier). Groups will only be matched if the liquidity credit required by orders in one group is less than or equal to the liquidity fee offered by orders in the other group. Groups will be matched starting with the group of buy orders with the highest priority. This group will be matched with the group of sell orders with the highest priority. If the aggregate size of all orders in both groups is the same, all orders in both groups will be matched. If the aggregate size of all orders in both groups is not the same, orders in the group with the smaller aggregate size will be allocated among orders in the group with the larger size on a pro-rata basis. If this results in any order receiving an odd lot or a mixed lot (e.g., 265 shares), the amount of shares that order receives shall be rounded down to the nearest round lot (e.g., 200 shares). All the odd lots for a particular Group (e.g., the 65 shares) shall be aggregated and then allocated to the largest order in the Group. If, after matching orders in a buy group with orders in a sell group, unmatched orders remain in the group of buy orders, MMX will continue the process of matching this group with successively lower priority groups of sell orders until all of the orders in the group of buy orders are either matched or are unable to be matched. After completion of the match described above, MMX will continue the process of matching groups and orders within those groups in accordance with the rules described above starting with successively lower priority buy order groups until no more matches can be made. Once all of the matches are made, MMX will determine whether any matched orders are conditional orders and if so, whether their conditions are fully satisfied. In the event that certain conditions are not fully satisfied, MMX will remove that order (and any other orders whose conditions are not fully satisfied). MMX will then erase the match for all orders in that security and will restart the matching process excluding all conditional orders whose conditions were not fully satisfied in the last matching process. This matching process and liquidity fee/credit payment scheme results in the liquidity fee being paid only when necessary, providing meaningful advantages to those willing to pay. a. Example #1: Buy group 1: Order 1--BUY 2000 XYZ + will pay 1 cents/shr liquidity fee Buy group 2: Order 1--BUY 2000 XYZ Sell group 1: Order 1--SELL 2000 XYZ Because the order in Buy group 1 is willing to pay a liquidity fee, this order will have the highest priority and will match with the order in Sell group 1. It will not be necessary for the order in Buy group 1 to pay a liquidity fee in this case. b. Example #2: Buy group 1: Order 1--BUY 2000 XYZ + will pay 1 cents/shr liquidity fee Buy group 2: Order 1--BUY 2000 XYZ Sell group 1: Order 1--SELL 1000 XYZ Sell group 2: Order 1--SELL 2000 XYZ + wants a 1 cents/shr liquidity credit Sell group 2: Order 2--SELL 2000 XYZ + wants a 1 cents/shr liquidity credit Because the order in Buy group 1 is willing to pay a liquidity fee, this order will match first with the order in Sell group 1 (1000 shares), then with the orders in Sell group 2 (each of whom will receive 500). The order in Buy group 1 will pay no liquidity fee for the order in Sell group 1, but will pay 1 cents/share for the orders in Sell group 2. Thus, the user will only pay an average liquidity fee of \1/2\ cents/share. Note: The order in Buy group 2 would not participate in the match as the only shares remaining to be matched require that a liquidity fee be paid. Orders willing to pay a liquidity fee will experience higher match rates than the other order types, with only an occasional payment of the liquidity fee. As in the above examples, because of the higher priority, a willingness to pay a higher liquidity fee will often result in a lower average liquidity fee paid or even no liquidity fee paid. Again, because of the priority rules, this system minimizes the liquidity fee rather than maximizing the shares matched. The CHX believes that this encourages users to enter liquidity fees and credits without fear of being disadvantaged by the system. These liquidity charges are exchange fees and credits and will be paid to the exchange for disbursal to those entitled to receive them. 4. Other Issues As discussed above, while entering stocks into his computer, a user can include a limit price. This feature allows a user to specify a maximum buy price or minimum sell price to protect the user against large swings in the price of a stock that may occur between the time he enters the trade into his computer and the cross. If a limit price is entered, the order will not participate in the match if the stock is above (or below) the limit price at the time of the cross, depending on whether the order is a buy order (or sell order). Of course, if the stock is within the limit range, the execution price will be the same as for all other stocks in the cross. In addition, as discussed above, users can enter linked orders. These are orders that are combined with other orders. For example, a user may only want to sell stock A if he can buy stock B. A user would then link his sell order of stock A to his buy order of stock B. Then, when the match occurs, the user's order to sell stock A will only be executed if the user's order to buy stock B is also executed. Otherwise, both orders will remain unmatched. The MMX facility, by allowing linked orders and allowing orders that specify a limit price, allows money managers greater cash management capabilities. The CHX believes that this in turn will cause the effective match rate of the MMX facility to be greater than other crossing systems. It should also be noted that a user can only prohibit a match with another particular user because of a concern that an ERISA violation might occur if a match took place. 5. Fees The Exchange will only charge a fee to users of the MMX Facility if their order is executed (or matched, in the case of securities that are not listed on the Exchange or have UTP). The Exchange fee will be as follows: Orders entered by MMX market makers and orders that are part of CHX's quote will not be charged a transaction fee; users who enter orders that the user is willing to display will be charged $.005 per share; and all other users will pay $.02 per share. There will be no fee to enter or cancel orders in the system. The Exchange fee does not cover liquidity fees and credits. The MMX market makers will be paid \1/8\th of a cent per share when they do not participate in a cross in their issue so long as the liquidity parameter enter by the MMX market maker is within a pre-determined range. This \1/8\ of a cent per share fee will be paid by the Exchange out of the \1/2\ of a cent (or 2 cent) user fee that CHX will receive from users of the MMX facility. This will provide the MMX Market Maker with an incentive to providing a guarantee. In the event there is more than one MMX market maker in an issue, the \1/8\ of a cent per share fee will be paid to the MMX market maker that enters the highest liquidity fee or lowest liquidity credit. If more than one MMX market maker enters the same fee or credit, such fee will be pro-rated. An additional Exchange fee will be imposed on all users equal to the liquidity fee to be paid with respect to a particular order, and an Exchange credit will occur that is equal to the liquidity credit to be received. The clearing broker will collect all fees from institutions and submit the appropriate amounts to Midwest Clearing Corporation (``MCC''). MCC, in turn, will pay the appropriate amounts to clearing brokers for forwarding to institutions. 6. Surveillance To protect against any potentially manipulative activity, the Exchange will monitor quote changes prior to the match and shortly thereafter to identify unusual trading activity. 7. ``Near Match Orders'' and Floor Broker Participation Because of the possibility that the match rate will be below 100%, the MMX facility will allow users to send orders that are not crossed in the match to a broker in the event of a ``near match.'' A near match is the presence of a buyer and seller in the MMX facility who did not match merely because the liquidity fees and credits that they required, differed. For example, a seller may be willing to sell and pay a 6 cent per share liquidity fee, but the buyer wants to be paid 7 cents per share for providing liquidity. If a near match occurs users will get administrative messages stating that a near match occurred. Each user would then have the option of indicating that it would like a pre- determined broker to call to negotiate that order. If both parties to the near match wish to negotiate, then the broker (or brokers) will receive a negotiate message. Because the broker or brokers do not learn anything about the order unless both parties to the near match have given their approval, the users of the MMX facility retain complete control during this process. Similar to the ``near match'' function described above, floor brokers can enter a message that, after the match, will tell the users entering orders in a particular stock of an indication of interest in that stock (even when there is not an actual order). The user would then be free to contact the floor broker to negotiate a trade. The MMX facility will give users the ability to screen out indications if they become dissatisfied with the quality of the information. 8. Execution Reports Execution reports will be sent after any execution occurs. For customers using DTC's ID system, information will be forwarded to the clearing broker who will then submit the information to the ID system. 9. Statutory 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, and is not designed to permit unfair discrimination between customers, issuers, brokers or dealers. (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 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. 552, will be available for inspection and copying at the principal office of the CHX. All submissions should refer to File No. SR-CHX-93-19 and should be submitted by February 25, 1994. For the Commission by the Division of Market Regulation, pursuant to delegated authority. Jonathan G. Katz, Secretary. [FR Doc. 94-2579 Filed 2-3-94; 8:45 am] BILLING CODE 8010-01-M --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-2579. Public record. Not legal advice.