Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change by the Chicago Stock Exchange, Incorporated Relating to the Implementation of Modified Versions of the SuperMAX System on a Pilot Basis

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36027; File No. SR-CHX-95-15]

Self-Regulatory Organizations; Notice of Filing and Order

Granting Accelerated Approval of Proposed Rule Change by the Chicago

Stock Exchange, Incorporated Relating to the Implementation of Modified

Versions of the SuperMAX System on a Pilot Basis

July 27, 1995.

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

[[Page 39466]]

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

June 29, 1995, the Chicago Stock Exchange, Incorporated (``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. On July 21, 1995, the Exchange submitted Amendment No. 1

to the proposed rule change.\1\ The Commission is publishing this

notice to solicit comments on the proposed rule change from interested

persons.

\1\ See letter from David Rusoff, Foley & Lardner, to Glen

Barrentine, Senior Counsel, SEC, dated July 21, 1995. In Amendment

No. 1, the Exchange requests that the proposed rule change be

considered under 19(b)(2) on one-year pilot basis rather than under

19(b)(3)(A) and makes certain clarifying changes to the text of Item

I.

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

of the Proposed Rule Change

The Exchange proposes to add subsection (e) and subsection (f) to

Rule 37 of Article XX relating to the CHX's MAX System. The text of the

proposed rule is as follows [new text is italicized]:

Article XX

Rule 37

(e) The Exchange's Enhanced SuperMAX program shall be an

automatic execution program within MAX in which a Specialist may

voluntarily choose to participate on a stock-by-stock basis. A

Specialist shall decide if his or her stock will be eligible for

Enhanced SuperMAX treatment. In the event that a stock is eligible

for Enhanced SuperMAX treatment (pursuant to paragraph (e) of this

Rule) and SuperMAX treatment (pursuant to paragraph (c) of this

Rule) at the same time, the size of the order will determine which

program will be followed for execution. An order of 599 shares or

less will execute according to the SuperMAX program and an order

greater than 599 shares will execute according to the Enhanced

SuperMAX program. In the event that a Specialist determines that his

stock is eligible for Enhanced SuperMAX and voluntarily chooses to

participate in Enhanced SuperMAX, agency market orders up to and

including 1099 shares (or such greater size specified by a

specialist and approved by the Exchange) in that stock may

automatically be stopped and executed in MAX, through the Enhanced

SuperMAX program, without any specialist intervention based on the

following criteria:

(1) Stopping. If an agency market order eligible for Enhanced

SuperMAX would create either a double up tick (buy order) or double

down tick (sell order) if the order was executed at the consolidated

best bid or offer (``NBBO'') the Enhanced SuperMAX program will

``stop'' the order. Once stopped, the order will not receive an

execution that is worse than the stop price. Notwithstanding

anything in the previous sentence to the contrary, agency market

orders in markets quoted with a minimum variation (usually \1/8\

spread) will not be stopped. Orders not stopped will be immediately

executed based upon the NBBO as the case may be.

(2) Pricing. Buy Orders stopped under (1) above will be executed

as follows:

(i) If the next primary market sale is equal to or less than the

last sale then the stopped order will be executed at such last sale

price (subject, however, to the Exchange's block protection policy

as set forth in interpretation and policy .06 of Rule 7 of this

Article).

(ii) If the next primary market sale is greater than the last

sale then the stopped order will be executed at such next primary

market sale price. However, if the next primary market sale is

greater than the stop price then the stopped order will be filled at

the stopped price (i.e. at the offer).

Sell orders stopped under (1) above will be executed as follows:

(iii) If the next primary market sale is equal to or greater

than the last sale then the stopped order will be executed at such

last sale price (subject, however, to the Exchange's block

protection policy as set forth in interpretation and policy .06 of

Rule 7 of this Article).

(iv) If the next primary market sale is less than the last sale

then the stopped order will be executed at such primary market sale

price. However, if the next primary market sale is less than the

stop price then the stopped order will be filled at the stopped

price (i.e. at the bid).

(3) Operating Time. Enhanced SuperMAX will operate each day that

the Exchange is open for trading from 8:45 a.m. (C.T.) until the

close. In unusual trading situations, individual stocks or all

stocks may be removed from Enhanced SuperMAX with the approval of

two members of the Committee on Floor Procedure.

(4) Timing. Orders entered into Enhanced SuperMAX shall, when

due a fill under the Enhanced SuperMAX program, be immediately

executed without any delay (i.e. 0 seconds).

(5) Applicability to Odd-Lots. Although an order generated by

the Odd-Lot Execution Service (``OLES'') is a professional order

(because it is deemed to be for the account of a broker-dealer), it

is nonetheless eligible for Enhanced SuperMAX execution if: (i) the

issue is on Enhanced SuperMAX, (ii) it is an order for 200 shares or

less, and (iii) it is an OLES passively driven, system-generated

market order (and not an actively managed order).

(6) Out of Range. Notwithstanding anything in this paragraph (e)

to the contrary, Enhanced SuperMAX will not execute an order at the

NBBO if such execution would result in an out of range execution.

(7) Other. Any eligible order in a stock included in Enhanced

SuperMAX which is manually presented at the Specialist post by a

floor broker must also be guaranteed an execution by the Specialist

pursuant to the criteria set forth in this paragraph (e). In the

event that a contra side order which would better an Enhanced

SuperMAX execution is presented at the post, the incoming order

which is executed pursuant to the Enhanced SuperMAX criteria must be

adjusted to the better price.

(f) The Exchange's Timed Enhanced SuperMAX program shall be an

automatic execution program within MAX in which a Specialist may

voluntarily choose to participate on the stock-by-stock basis. A

Specialist shall decide if his or her stock will be eligible for

Timed Enhanced SuperMAX treatment. In the event that a Specialist

determines that his or her stock is eligible for Timed Enhanced

SuperMAX and voluntarily chooses to participate in Timed Enhanced

SuperMAX, agency market orders up to and including 1099 shares (or

such greater size as specified by the Specialist and approved by the

Exchange) will automatically be executed in MAX, through the Timed

Enhanced SuperMAX program, without any Specialist intervention, in

accordance with the Enhanced SuperMAX program and rules (as

specified in paragraph (e) of this Rule and subparagraphs (1)

through (7) thereunder) with the following modification:

(1) Timer. In the event that an order is stopped pursuant to the

criteria described in paragraph (e)(1) of this Rule, such order

shall be executed at the stopped price if there are no executions in

the primary market at the end of the applicable Time Out Period (as

defined below). For purposes of this paragraph (f), the Time Out

Period shall be the time specified by the specialist on stock-by-

stock basis based on the size of the order. Such Time Out Period

shall be preselected by a specialist, may be changed by a specialist

no more frequently than once a month and may be no less than 30

seconds.

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 III 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

On May 22, 1995, the Commission approved a proposed rule change of

CHX that allows specialists on the Exchange, through the Exchange's MAX

system, to provide order execution guarantees that are more favorable

than those required under CHX Rule 37(a), Article XX.\2\ That approval

order

[[Page 39467]]

contemplated that the CHX would file with the Commission specific

modifications to the parameters of MAX that are required to implement

various options available under this new rule.

\2\ See Securities Exchange Act Release No. 325753 (May 22,

1995), 60 FR 28007 (May 26, 1995) (File No. SR-CHX-95-08).

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The purpose of the proposed rule change is to set forth two options

available under this new rule. One option is merely a reactivation of

the Exchange's Enhanced SuperMAX program, a program originally approved

by the Commission on a pilot basis in 1991.\3\ Unlike the old pilot

program, however, the new Enhanced SuperMAX program will be available

starting at 8:45 a.m. instead of 9:00 a.m. This program differs from

the Exchange's SuperMAX program is that under this program, certain

orders are ``stopped'' at the NBBO \4\ and are executed with reference

to the next primary market sale instead of the previous primary market

sale.

\3\ See Securities Exchange Act Release No. 30058 (Dec. 10,

1991), 56 FR 65765 (Dec. 18, 1991) (order approving SR-MSE-91-12).

The pilot program was subsequently extended in Securities Exchange

Act Release Nos. 30701 (May 14, 1992), 57 FR 21683 (May 21, 1992)

(File No. SR-MSE-92-06); 310238 (Aug. 13, 1992), 57 FR 37856 (Aug.

20, 1992) (File No. SR-MSE-92-09); and 31857 (Feb. 12, 1993) 58 FR

9227 (Feb. 19, 1993) (File No. SR-MSE-01).

\4\ The term national best bid or best offer is defined under

SEC Rule 11Ac1-2 as the highest bid or lowest offer for a reported

security made available by any reporting market center pursuant to

Rule 11Ac1-1 or the highest bid or lowest offer for a security other

than a reported security disseminated by an over-the-counter market

maker in Level 2 or 3 of Nasdaq.

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The other option is a slight variation on the Enhanced SuperMAX

program. This other option, the Timed Enhanced SuperMAX program, will

execute orders in the same manner as the Enhanced SuperMAX program

except that if there are no executions in the primary market after the

order has been stopped for a designated time period, the order will be

executed at the stopped price at the end of such period. Such period,

known as a time out period, will be pre-selected by a specialist on a

stock-by-stock basis based on the size of the order, may be changed by

a specialist no more frequently than once a month, and may be no less

than 30 seconds.

2. Statutory Basis

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

Act in that it is designed to promote just and equitable principles of

trade, to remove impediments and to perfect the mechanism of a free and

open market and a national market system, and, in general, to protect

investors and the public interest.

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

The proposed rule change will impose no burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed

Rule Change Received from Members, Participants or Others

No written comments were solicited or received with respect to the

proposed rule change.

III. 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, N.W., Washington, D.C. 20549.

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

the Commission's Public Reference Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such filing will also be available

for inspection and copying at the principal office of the Exchange. All

submissions should refer to File No. SR-CHX-95-15 and should be

submitted by August 23, 1995.

IV. Commission's Findings and Order Granting Accelerated Approval of

Proposed Rule Change

The Commission has reviewed carefully CHX's proposed rule change

and concludes 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, and in particular, with

Section 6(b)(5) of the Act.\5\

\5\ 15 U.S.C. 78f(b)(5) (1988 & Supp. V. 1993).

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The proposed rule change provides for modified versions of the

SuperMAX system \6\ (Enhanced SuperMAX and Timed Enhanced SuperMAX).

These modified versions will operate as separate systems and will be

available to CHX specialists as additions or alternatives to

SuperMAX.\7\ Participation in Enhanced SuperMAX and Timed Enhanced

SuperMAX will be voluntary for specialists and will apply on a stock-

by-stock basis for agency market orders of 1,099 shares or fewer in

Dual Trading Systems issued.\8\

\6\ SuperMAX is a system that automatically improves executions

of small agency market orders from the consolidated best bid or

offer according to certain predefined criteria. In 1990, the

Commission first approved SuperMAX on a pilot basis. See Securities

Exchange Act Release No. 28014 (May 14, 1990), 55 FR 20880 (May 21,

1990) (File No. SR-MSE-90-05). In 1993, the Commission approved

SuperMAX on a permanent basis. For more detail regarding SuperMAX,

see infra note 12 and the accompanying text.

\7\ The Exchange will file an amendment to the proposed rule

change in the near future to codify the procedures with respect to a

specialist's ability to make a security eligible for Enhanced

SuperMAX and Time Enhanced SuperMAX. A specialist will be permitted

to engage and disengage Enhanced SuperMAX and Timed Enhanced

SuperMAX for a given stock only once a month. See letter from David

Rusoff, Foley & Lardner, to Glen Barretine, Senior Counsel, SEC,

dated July 21, 1995.

\8\ The Dual Trading System of the Exchange allows the execution

of both round-lot and odd-lot orders in certain issues assigned to

specialists on the Exchange and listed on either the New York Stock

Exchange or the American Stock Exchange.

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Under the proposed rule change, Enhanced SuperMAX and Timed

Enhanced SuperMAX would automatically stop a market order if its

execution at the consolidated best bid or offer (``BBO'') would create

either a double up tick or double down tick. If the execution at the

BBO would not result in a double up tick or double down tick, then

Enhanced SuperMAX and Timed Enhanced SuperMAX would execute the order

at the BBO. Once a security chosen by a specialist for Enhanced

SuperMAX and Timed Enhanced SuperMAX is stopped, a buy (sell) order is

guaranteed at least the offer (bid) price prevailing at the time of the

stop (``stop price'').

The stopped Enhanced SuperMAX and Timed Enhanced SuperMAX eligible

order would be executed based upon the next sale in the primary market

according to the execution criteria. The Enhanced SuperMAX and Timed

Enhanced SuperMAX algorithm compares the previous last sale price to

the next sale price, and considers the direction of the market by those

sales prices, to determine the price at which the stopped market order

will be filled. The procedures under Enhanced SuperMAX and Timed

Enhanced SuperMAX are identical except the stopped order in Timed

Enhanced SuperMAX will be executed at the expiration of a specified

time period as designated by a specialist.

Under the proposal, Enhanced SuperMAX and Timed Enhanced SuperMAX

would not execute an order at the BBO if such execution would

[[Page 39468]]

result in an out-of-range execution.\9\ If a specialist chooses the

Enhanced SuperMAX and Timed Enhanced SuperMAX, the criteria for the

systems must be followed for all eligible stocks. If a specialist

chooses to have Enhanced SuperMAX and Timed Enhanced SuperMAX run

concurrently with SuperMAX, then the size of the agency market order

would determine which method of execution will be followed. An order of

599 shares or fewer will be executed according to SuperMAX rules; an

order of 600 shares to 1,099 shares will be executed according to

Enhanced SuperMAX and Timed Enhanced SuperMAX rules. An order will

never be subject to execution under the rules of both SuperMAX and

Enhanced SuperMAX (or Timed Enhanced SuperMAX).

\9\ The term ``out-of-range'' means either higher or lower than

the price range in which the security traded on the primary market

during a particular trading day.

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Any eligible order in a stock included in Enhanced SuperMAX or

Timed Enhanced SuperMAX that is manually presented at the specialist

post by a floor broker also must be guaranteed an execution by the

specialist pursuant to the appropriate system criteria. In the unlikely

event that a contra side order that would better the Enhanced SuperMAX

and Timed Enhanced SuperMAX execution is presented at the post, the

specialist must adjust the incoming order that was executed pursuant to

the Enhanced SuperMAX or Timed Enhanced SuperMAX criteria. During

volatile periods, individual stocks or all stocks may be removed from

Enhanced SuperMAX or Timed Enhanced SuperMAX with the approval of two

members of the Committee on Floor Procedure.\10\

\10\ When stocks are removed from Enhanced SuperMAX or Timed

Enhanced SuperMAX, CHX would broadcast a message through the MAX

system indicating that the affected stocks are off Enhanced SuperMAX

or Timed Enhanced SuperMAX. Telephone conversation between David

Rusoff, Foley & Lardner, and Jennifer Choi, Attorney, Division of

Market Regulation, SEC. on July 21, 1995.

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The Exchange represented that as a result of testing extensively

both versions of Enhanced SuperMAX, the Exchange concludes that

Enhanced SuperMAX and Timed Enhanced SuperMAX will not have any

significant impact upon CHX's systems capacity.\11\

\11\ See letter from David Rusoff, Foley & Lardner, to Glen

Barrentine, Senior Counsel, SEC, dated July 21, 1995.

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In 1991, the Commission approved on a pilot basis Enhanced SuperMAX

to run concurrently with SuperMAX, which was on a pilot at that

time.\12\ In the initial Enhanced SuperMAX pilot program approval

order, the Commission expressed concerns about the possible adverse

effects on execution quality of a lack of order exposure.\13\ The

Commission also acknowledged, however, that increased order exposure

may impose certain economic costs in terms of execution delay and

interjection of manual processing. Moreover, the Commission recognized

that most of the Exchange's automatic execution systems in effect (at

this time) provided executions at the quote only.

\12\ The Exchange sought approval of the Enhanced SuperMAX

program to evaluate both Enhanced SuperMAX and SuperMAX systems and

determine which system it wanted to implement. In 1993, the Exchange

chose to implement SuperMAX rather than Enhanced SuperMAX and sought

approval of SuperMAX on a permanent basis. The Commission

permanently approved SuperMAX believing that the automated execution

feature of SuperMAX would provide a more efficient means of

bettering the execution price on a large volume of electronically

delivered market orders than through manual processing. The Enhanced

SuperMAX pilot expired in 1993 without the Exchange requesting an

extension or permanent approval. See Securities Exchange Act Release

No. 32631 (July 14, 1993), 58 FR 30969 (July 21, 1993) (File No. SR-

MSE-93-10) (approving permanently SuperMAX).

\13\ See Secutiries Exchange Act Release No, 30058 (Dec. 10,

1991), 56 FR 65765 (Dec. 18, 1991) (order approving SR-MSE-91-12).

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In approving the Enhanced SuperMAX feature on a pilot basis, the

Commission believed that this proposal was less ideal than SuperMAX,

but that the Commission would revisit its concerns in the event that

the CHX requested permanent approval. In this regard, the Commission

stated that any request for permanent approval must be accompanied by a

report containing certain data on the Enhanced SuperMAX system.\14\

\14\ In the initial pilot approval order, the Commission

described its concerns with the program and requested that the

Exchange submit a report detailing the use of the pilot. The

Exchange, however, did not submit a report because specialists on

the Exchange made little or no use of the pilot program. Telephone

conversation between David Rusoff, Foley & Lardner, and Glen

Barrentine and Jennifer Choi, SEC. on July 18, 1995.

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The Commission believes that pricing and execution procedures of

Enhanced SuperMAX and Timed Enhanced SuperMAX are consistent with the

maintenance of fair and orderly auction markets on national securities

exchanges. Moreover, the Commission believes that the execution

criteria of Enhanced SuperMAX and Timed Enhanced SuperMAX should

contribute to an orderly market because they help to reduce variations

from trade to trade on low volume. Finally, although the proposals will

not automatically provide price improvement, they will provide some

opportunity for customers to receive a better price. The Enhanced

SuperMAX being proposed in this filing is identical to the previous

pilot program except that the start up time will be 8:45 a.m. (C.T.).

The Timed Enhanced SuperMAX procedures are identical to those of

Enhanced SuperMAX except that the stopped order will be executed at the

top price after a period of time that has been designated by the

specialist but may not be shorter than 30 seconds has expired. This

additional feature is intended to allow orders in inactive stocks to be

provided with an opportunity for price improvement but to be executed

without unduly delay. Therefore, the Commission finds that the proposed

rule change is consistent with Section 6(b)(5) of the Act, in that it

is designed to promote just and equitable principles of trade, perfect

the mechanisms of a free and open market, and in general to protect

investors and the public interest.

The Commission believes that it would be appropriate to allow the

Exchange to implement Enhanced SuperMAX and Timed Enhanced SuperMAX for

a one-year period to afford the Exchange and the Commission an

opportunity to monitor the operation of the systems and determine their

effectiveness. The Exchange should monitor the use of the systems

during the one-year pilot period and assure the Commission that there

are no adverse effects on the quality of customer order executions.

Moreover, the Exchange should examine the use of the systems during the

pilot period to determine whether specialists are choosing the

appropriate system for each of their stocks.

The Commission, therefore, requests that the Exchange submit a

report to the Commission by May 31, 1996, describing its experience

with the pilot program. At a minimum, this report should contain the

following data gathered during the first 9-month period after the

start-up date for Enhanced SuperMAX and Timed Enhanced SuperMAX: (1)

The number of orders executed in SuperMAX, Enhanced SuperMAX, and Timed

Enhanced SuperMAX; (2) share and dollar volume for all three systems;

(3) comparisons of orders executed under SuperMAX, Enhanced SuperMAX,

and Timed Enhanced SuperMAX, indicating where orders executed under one

system would have received a more favorable execution under another

system; (4) the number of specialists using each system, and the number

of stocks included in each; (5) the average length of time between

receipt of an order and execution under each system; (6) the types of

securities being chosen for each system (if a pattern is discernable);

(7) a break down of each issue chosen for

[[Page 39469]]

each system during the pilot period, including each date the issue was

placed on each system and removed; and (8) whether any distinguishable

market condition existed when an issue was placed on or taken off each

system. Any requests to modify this pilot program, to extend its

effectiveness, or to seek permanent approval for the pilot program also

should be submitted to the Commission by May 31, 1996, as a proposed

rule change pursuant to Section 19(b) of the Act.

The Commission finds good cause for approving the proposed rule

change prior to the thirtieth day after the date of publication of

notice thereof in the Federal Register. The Commission believes that it

is appropriate to approve the proposed rule change on an accelerated

basis so that the Exchange can enable public customers to receive the

benefits of Enhanced SuperMAX and Timed Enhanced SuperMAX without

delay. Moreover, the Enhanced SuperMAX feature previously has been on a

pilot program from December 1991 through April 1993, and the Commission

is approving CHX's Enhanced SuperMAX and Timed Enhanced SuperMAX only

for a one-year pilot period.\15\ During that time, the Commission and

the Exchange will be able to examine whether these programs are

successful at providing for automatic execution of orders at prices

consistent with the maintenance of fair and orderly markets and can

determine whether to extend the pilots for a further period or make the

programs permanent. The Commission, therefore, believes that granting

accelerated approval of the proposed rule change is appropriate and

consistent with Section 6 of the Act.\16\

\15\ The Enhanced SuperMAX system has been published for comment

in the Federal Register previously, and there have been no adverse

comments on it.

\16\ 15 U.S.C. 78f (1988 & Supp. V 1993).

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It is therefore ordered, pursuant to Section 19(b)(2) of the

Act,\17\ that the proposed rule change (SR-CHX-95-15) is approved on a

pilot basis until July 31, 1996.

\17\ 15 U.S.C. 78s(b)(2) (1988).

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For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\18\

\18\ 17 CFR 200.30-3a(a)(12) (1994).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-18960 Filed 8-1-95; 8:45 am]

BILLING CODE 8010-01-M