Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change by the Chicago Stock Exchange, Incorporated Relating to Enhanced SuperMAX

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38338; File No. SR-CHX-97-02]

Self-Regulatory Organizations; Notice of Filing and Order

Granting Accelerated Approval of Proposed Rule Change by the Chicago

Stock Exchange, Incorporated Relating to Enhanced SuperMAX

February 26, 1997.

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

(``Act''),\1\ notice is hereby given that on January 30, 1997, 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 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 to grant accelerated approval to the

proposal.

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\1\ 15 U.S.C. 78s(b)(1).

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

of the Proposed Rule Change

The Exchange requests permanent approval of its Enhanced SuperMAX

pilot program, as amended, located in subsection (e) of Rule 37 of

Article XX.

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

organizations 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

the 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 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.

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\2\ See Securities Exchange Act Release No. 35753 (May 22,

1995), 60 FR 28007.

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On July 27, 1995, the Commission approved a proposed rule change of

the CHX that implemented two options available under this new rule.\3\

These two new options, Enhanced SuperMAX and Timed Enhanced SuperMAX,

we approved on a pilot basis until July 31, 1996. The Commission

extended the pilot program until December 31, 1996 and requested that

the CHX provide a report to the Commission, by August 31, 1996,\4\

describing its experience with the pilot program. On August 30, 1996,

the CHX submitted the report. Most recently, the Commission extended

the pilot program until March 1, 1997.\5\ In connection with the

extension, the CHX agreed to provide additional data to the Commission

regarding the pilot. On January 31, 1997, the Exchange submitted this

data.

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\3\ See Securities Exchange Act Release No. 36027 (July 27,

1995), 60 FR 39465.

\4\ See Securities Exchange Act Release No. 37491 (July 29,

1996), 61 FR 48690.

\5\ See Securities Exchange Act Release No. 38098 (December 30,

1996), 62 FR 1008. Commission note: The CHX Form 19b-4 filing

indicates incorrectly that the pilot program was extended until

March 31, 1997.

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The purpose of the proposed rule change is to request permanent

approval of the pilot program, as amended by this filing. Specifically,

the Exchange is combining the two options currently available under the

pilot program into one option, to be called Enhanced SuperMAX. Enhanced

SuperMAX was merely a reactivation of the Exchange's Enhanced SuperMAX

program, a program originally approved by the Commission on a pilot

basis in 1991.\6\ The proposed Enhanced SuperMAX program differs from

the original pilot program approved in 1991 in that it is available

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

from the Exchange's SuperMAX program in that under this program,

certain orders are ``stopped'' at the consolidated best bid or offer

and are executed with reference to the next primary market sale instead

of the previous primary market sale.

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\6\ See Securities Exchange Act Release No. 30058 (December 10,

1991), 56 FR 65765.

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The Enhanced SuperMAX program, as amended by this filing, also

includes all of the features of the pilot version of the Timed Enhanced

SuperMAX program. Essentially, the new Enhanced SuperMAX program will

execute orders in the same manner as the pilot 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 is executed at the stopped price at the end of such period. Such

period, known as a time out period, is 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 Exchange does not believe that the proposed rule change will

impose a burden on competition.

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. Commission's Findings and Order Granting Accelerated Approval of

Proposed Rule Change

The Commission has carefully reviewed the Exchange's proposed rule

change and, for the reasons set forth below, finds that the proposed

rule change, as amended by this filing, is consistent with the

requirements of the Act and the rules and regulations thereunder

applicable to the Exchange, and, in particular, with Section 6(b)(5)\7\

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

[[Page 10103]]

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

investors and the public interest.

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\7\ 15 U.S.C. 78f(b)(5).

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The proposed rule change provides for a modified version of the

SuperMAX system. 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, including the last

sale in the primary market. In 1990, the Commission first approved

SuperMAX on a pilot basis.\8\ In 1991, the Commission approved Enhanced

SuperMAX on a pilot basis to run concurrently with SuperMAX, which was

still on a pilot at that time.\9\ This program differed from the

Exchange's SuperMAX program in that under this program, certain orders

are ``stopped'' at the consolidated best bid or offer and are executed

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

primary market sale. The Exchange sought approval of the Enhanced

SuperMAX and SuperMAX systems to evaluate both systems and to determine

which system it wanted to implement.

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\8\ See Securities Exchange Act Release No. 28014 (May 14,

1990), 55 FR 20880.

\9\ Supra note 6.

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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.\10\ The Enhanced SuperMAX pilot expired in 1993 without the

Exchange requesting an extension or permanent approval. In the initial

Enhanced SuperMAX pilot approval order, the Commission had 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.\11\ Since the Exchange revived the Enhanced

SuperMAX pilot program in 1995 (and at the same time requested the

Commission approve a pilot of Timed Enhanced SuperMAX), according to

reports submitted by the Exchange, no orders have been executed in the

Enhanced SuperMAX program because no specialist has chosen this

option.\12\ According to the Exchange, there are two reasons for the

lack of use of this option. First, there has been no interest in this

option from customers. Second, competitors (especially third market

firms) now give executions with a time-out feature that is akin to

Timed Enhanced SuperMAX. As a result, the Exchange states, customers

have come to expect, and now desire, an execution after a designated

time period.\13\

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\10\ Securities Exchange Act Release No. 32631 (July 14, 1993),

58 FR 30969 (order approving SuperMAX permanently).

\11\ Id.

\12\ Report of the Chicago Stock Exchange Relating to the

Enhanced SuperMAX and Timed Enhanced SuperMAX Pilot Programs (August

30, 1996) at 1 (``First Report'') (covering the three month period

ending August 27, 1996); Second Report of the Chicago Stock Exchange

Relating to the Enhanced SuperMAX and Timed Enhanced SuperMAX Pilot

Programs (January 30, 1997) at 1 (``Second Report'') (covering the

three month period ending January 20, 1997).

\13\ First Report, supra note 12 at 1; Second Report, supra note

12 at 1.

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The Exchange has revised the rule to combine Enhanced SuperMAX and

Timed Enhanced SuperMAX into one option, Enhanced SuperMAX, as amended,

which preserves the option of the Enhanced SuperMAX in its pilot form

while recognizing that customers have almost exclusively chosen the

Timed Enhanced SuperMAX option. As a result, if a specialist has

selected a time-out period, and there is a sale during the time-out

period, the execution price is the same as it would have been under

Enhanced SuperMAX. If, however, there is no sale in the primary market

during the time-out period, execution will occur at the stopped price

at the end of the time-out period.

The Commission finds appropriate the combining of the two options

currently available under the pilot program into one option, now called

Enhanced SuperMAX, even if no orders have been executed on the Enhanced

SuperMAX pilot program. With this approach, the Exchange has

streamlined the rule and also preserved the option for customers to use

the former Enhanced SuperMAX option. This approach also eliminates the

need for the Exchange to apply to the Commission for a re-activation of

the Enhanced SuperMAX option.

The Commission finds that the pricing and execution features of

Enhanced SuperMAX, as amended, are not inconsistent with the

maintenance of fair and orderly auction markets on national securities

exchanges and the protection of investors. The execution criteria of

Enhanced SuperMAX, as amended, should contribute to an orderly market

because they help to reduce the price variations from trade to trade on

low volume.

The Commission recognizes that the increased competition that

results from permitting regional specialists to attract orders from

other markets by providing superior quotations and more efficient order

executions generally enhances market making ability and the quality of

customer order executions. The Commission believes the automated

pricing parameters and execution procedures of the Enhanced SuperMAX

system, as amended, may enhance competition by opening an alternative

electronic order routing and execution system for smaller size orders.

Although the Commission finds that Enhanced SuperMAX, as amended,

would not automatically provide a \1/8\ point price improvement, it

would provide some opportunity for price improvement. The Exchange

indicated in the First Report that 38% of the eligible orders under the

Timed Enhanced SuperMAX algorithm received price improvement,\4\ and in

the Second Report that 44% of the eligible orders under the Timed

Enhanced SuperMAX algorithm received price improvement.\15\ As part of

the Second Report, the Exchange provided a comparison of executions

occurring on one day under SuperMAX and Timed Enhanced SuperMAX

(Enhanced SuperMAX, as amended) for a single stock, Nike, Inc. Under

the SuperMAX algorithm, 12 of 81 eligible trades received \1/8\ point

price improvement. The Exchange determined that if Nike, Inc, had been

on Timed Enhanced SuperMAX, rather than SuperMAX, between two and

twelve orders would have received price improvement, depending on the

length of the time-out period. If the time-out period had been set at

30 seconds, only two orders would have been price improved. If the

time-out period had been set at 30 seconds, only two orders would have

been priced improved. If the time-out period had been set at 5 minutes,

12 orders would have been price improved, and one of those orders would

have received \1/4\ price improvement. The Exchange concluded that

Timed Enhanced SuperMAX could provide greater price improvement than

the SuperMAX algorithm under certain circumstances.\16\

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\14\ First Report, supra note 12 at 2.

\15\ Second Report, supra note 12 at 2.

\16\ Id.

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The Commission finds good cause for approving the proposed rule

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

in the Federal Register. The Commission believes that it is appropriate

to approve the proposed rule change on an accelerated

[[Page 10104]]

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

benefits of Enhanced SuperMAX, as amended, without the interruption

that would result if the pilot program were allowed to expire on March

1, 1997 without permanent approval of the program in place. Moreover,

both the Enhanced SuperMAX and Timed Enhanced SuperMAX have operated

without any significant problems as pilot programs since July, 1995.

Finally, the Commission received no comments on the Exchange's earlier

request for permanent approval of the pilot, which was published for

comment on November 20, 1996.\17\ The Commission, therefore, believes

that granting accelerated approval of the proposed rule change is

appropriate and consistent with Section 6(b)(5) of the Act.\18\

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\17\ Securities Exchange Act Release No. 37497 (November 13,

1996), 61 FR 59124.

\18\ 15 U.S.C. 78f.

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IV. Solicitation of Comments

Interested persons are invited to submit written data, views and

arguments concerning the foregoing. Persons making written submission

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 in the

Commission's Public Reference Room, 450 Fifth Street, NW., Washington,

DC 20549. Copies of such filing also will be available for inspection

and copying at the Exchange. All submissions should refer to File No.

SR-CHX-97-02 and should be submitted by March 26, 1997.

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

Act,\19\ that the proposed rule change be, and hereby is, approved on

an accelerated basis.

\19\ 15 U.S.C. 78s(b)(2).

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For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\20\

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\20\ 17 CFR 200.30-3(a)(12)

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97-5369 Filed 3-4-97; 8:45 am]

BILLING CODE 8010-01-M