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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40017; File No. SR-CHX-98-09]

Self-Regulatory Organizations; Notice of Filing and Order

Granting Accelerated Partial Temporary Approval of Proposed Rule Change

by the Chicago Stock Exchange, Incorporated Amending the SuperMAX and

Enhanced SuperMAX Algorithms

May 20, 1998.

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

(``Act''),\1\ notice is hereby given that on April 20, 1998, 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, on a

temporary basis, for a portion of the proposed rule change relating to

a new SuperMAX algorithm.

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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 proposes to amend its SuperMAX and Enhanced SuperMAX

programs, located in subsections (c) and (e) of Rule 37 of Article XX.

Specifically, the Exchange is proposing new algorithms to provide price

improvement under SuperMAX and Enhanced SuperMAX in \1/16\th point

markets. Below is the text of the proposed rule change, additions are

italicized; deletions are bracketed.

(c) SuperMAX.

[The Exchange's 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 SuperMAX treatment. In the event that

a Specialist determines that his stock is eligible for SuperMAX and

voluntarily chooses to participate in SuperMAX, small agency market

orders in that stock will automatically be executed in MAX, through the

SuperMAX program, without any Specialist intervention based on the

following criteria (for purposes of this Rule, small market orders

shall mean orders up to and including 599 shares, except for the 500

stocks listed in the

[[Page 29278]]

S&P 500TM Index, in which case, small market orders shall

mean orders up to and including 1099 shares):

(1) Pricing.

(i) Both buy and sell orders in markets quoted with less than \1/4\

point spread or orders which do not meet the criteria in (ii) or (iii)

below will be executed based on the ITS BBO.

(ii) Buy orders in markets quoted with a \1/4\ point spread or

wider will be executed at a price \1/8\th point better than the ITS

Best Offer if (i) an execution at the ITS Best Offer would create a

double up tick based upon the last sale in the primary market or (2) an

execution at the ITS Best Offer would result in a greater than a \1/

8\th point price change from the last sale in the primary market.

(iii) Sell orders in markets quoted with a \1/4\ point spread or

wider will be executed at a price \1/8\th point better than the ITS

Best Bid if (i) an execution at the ITS Best Bid would create a double

down tick based upon the last sale in the primary market or (2) an

execution at the ITS Best Bid would result in a greater than a \1/8\th

point price change from the last sale in the primary market.

For example, the execution price for a market buy order in a \1/4\-

\1/2\ quoted market is as follows:

------------------------------------------------------------------------

Tick/last sale Execution price

------------------------------------------------------------------------

+\1/2\................................. \1/2\

+\3/8\................................. \3/8\

-\3/8\................................. \1/2\

-\1/4\................................. \3/8\

+\1/4\................................. \3/8\ (if in range)

------------------------------------------------------------------------

The execution price for a market buy order in a \1/4\-\5/8\ quoted

market is as follows:

------------------------------------------------------------------------

Tick/last sale Execution price

------------------------------------------------------------------------

+\5/8\............................................... \5/8\

+\1/2\............................................... \1/2\

\3/8\................................................ \1/2\

-\1/2\............................................... \5/8\

-\3/8\............................................... \1/2\

-\1/4\............................................... \1/2\

+\1/4\............................................... \1/2\

------------------------------------------------------------------------

(2) Operating Time. SuperMAX will operate each day that the

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

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

from SuperMAX with the approval of two members of the Committee on

Floor Procedure.

(3) Timing. Orders entered into SuperMAX shall be immediately

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

(4) 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 SuperMAX execution if: (i) the issue is on

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).

(5) Other. Any eligible order in a stock included in 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 (1) above. In the event that a contra side order

which would better a SuperMAX execution is presented at the post, the

incoming order which is executed pursuant to the SuperMAX criteria must

be adjusted to the better price.]

SuperMAX shall be a voluntary automatic execution program within

the MAX System. SuperMAX shall be available for Dual Trading System

securities. Dual Trading System securities are securities that are

traded on both the Exchange and either the New York Stock Exchange or

the American Stock Exchange. A specialist may choose to enable this

voluntary program within the MAX System on a security-by-security

basis. In the event that the security is eligible for SuperMAX and the

specialist in such security has chosen to engage SuperMAX for such

security, small agency market orders in that security will

automatically be executed in accordance with the SuperMAX algorithm, as

set forth below. For purposes of this subsection (c), the term ``small

agency market order'' shall mean an agency order from 100 shares up to

and including 499 shares (or such greater amount specified by the

specialist and approved by the Exchange).

(1) Pricing.

(i) In the event that a small agency market order to buy or sell is

received in a security in which SuperMAX has been enabled, such order

shall be executed at the ITS Best Offer (for a buy order) or ITS Best

Bid (for a sell order) if (A) the spread between the ITS Best Bid and

the ITS Best Offer in such security at the time the order is received

is less than \1/8\th of a point, or (B) the order does not

meet the criteria in (ii) below.

(ii) In the event that a small agency market order to buy or sell

is received in a security in which SuperMAX has been enabled, and the

last primary market sale is at least 1/8th of a point lower than (for a

buy order) or higher than (for a sell order) the ITS Best Offer (for a

buy order) or the ITS Best Bid (for a sell order), such order shall be

executed a \1/16\th of a point lower than the ITS Best Offer

(for a buy order) or \1/16\th of a point higher than the ITS

Best Bid (for a sell order).

(2) Operating Time.

SuperMAX will operate each day that the Exchange is open for

trading from 8:45 a.m. (C.T.) until the close of the Primary trading

Session. A specialist may enable or remove SuperMAX for a particular

security only on one given day each month, as determined by the

Exchange from time to time. Notwithstanding the previous sentence,

during unusual market conditions, individual securities or all

securities may be removed from SuperMAX with approval of two members of

the Committee on Floor Procedure.

(3) Timing.

Orders entered into SuperMAX shall be immediately executed upon

completion of the algorithm without any delay (i.e., 0 seconds).

(4) 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 SuperMAX

execution if: (i) the issue is on 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).

(5) Out of Range.

Notwithstanding anything herein to the contrary, SuperMAX will not

automatically execute an order if such execution would result in an out

of range execution.

(6) Other.

Any eligible order in a security included in 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 (1) above. In the event that a contra side order which

would better a SuperMAX execution is presented at the post, the

incoming order which is executed pursuant to the SuperMAX criteria must

be adjusted to the better price.

(d) No change in text.

(e) Enhanced SuperMAX

[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

[[Page 29279]]

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 and the inclusion of the security in the S&P 500TM

Index will determine which program will be followed for execution. If a

stock is not included in the S&P 500TM Index, an order of

299 shares or less will execute according to the SuperMAX program and

an order from 300 shares up to and including 1099 shares (or such

greater size specified by the specialist and approved by the Exchange)

will execute according to the Enhanced SuperMAX program. If a stock is

included in the S&P 500TM Index, or if a specialist in a

non-S&P 500TM Index issue so chooses, an order of 599 shares

or less will execute according to the SuperMAX program and an order

from 600 shares up to and including 1099 shares (or such greater size

specified by the specialist and approved by the Exchange) will execute

according to the Enhanced SuperMAX program. In the event that a

specialist determines that his stock is eligible for Enhanced SuperMAX

only 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 ITS BBO, the

Enhanced SuperMAX program will ``stop'' the order. Once stopped, the

order will not receive an execution that is worse than the stopped

price. Notwithstanding anything in the previous sentence to the

contrary, agency market orders in markets quoted in less and a \1/4\

point market will not be stopped. Orders not stopped will be

immediately executed based upon the ITS BBO 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 stopped price then the stopped order will be filled at the stopped

price.

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

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

price.

Notwithstanding anything in this paragraph (2) to the contrary,

orders stopped under this paragraph that are subject to a Time Out

Period (as defined below) 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. The Time Out Period shall be the time

specified by the specialist on a stock-by-stock basis based on the size

of the order. Such Time Out Period may be changed by a specialist no

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

specialist shall not be required to specify a Time Out Period. If no

Time Out Period is specified, no Time Out Period shall apply.

(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.

A specialist may make a particular stock eligible for Enhanced SuperMAX

and may remove a particular stock from Enhanced SuperMAX only on one

given day each month, as determined from time to time by the Exchange.

Notwithstanding anything in the previous sentence to the contrary, 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 drive, 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 ITS

BBO 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.]

Enhanced SuperMAX shall be a voluntary automatic execution program

within the MAX System. Enhanced SuperMAX shall be available for any

Dual Trading System security in which SuperMAX has been enabled. A

specialist may choose to enable this voluntary program within the MAX

System on a security-by-security basis. In the event that the security

is eligible for Enhanced SuperMAX and the specialist in such security

has chosen to engage Enhanced SuperMAX for such security, small agency

market orders in that security will automatically be executed in

accordance with the Enhanced SuperMAX algorithm, as set forth below.

For purposes of this subsection (e), the term ``small agency market

order'' shall mean an agency order for at least 500 shares, up to and

including 2099 shares (or such greater amount chosen by the specialist

and approved by the Exchange). Notwithstanding the previous sentence,

the smallest size order in a particular security that is eligible for

Enhanced SuperMAX shall always be of a size that is at least one share

greater than the largest size order in such security that is eligible

for SuperMAX.

(1) Stopping.

(i) In the event that a small agency market order to buy or sell is

received in a security in which Enhanced SuperMAX has been enabled, and

both (A) the spread between the ITS Best Bid and the ITS Best Offer in

such security at the time the order is received is equal to or greater

than \3/16\th of a point, and (B) the last primary market sale is at

least \1/8\th of a point lower than (for a buy order) or higher than

(for a sell order) the ITS Best Offer (for a buy

[[Page 29280]]

order) or the ITS Best Bid (for a sell order), Enhanced SuperMAX shall

``stop'' the order at the ITS Best Offer (for a buy order) or at the

ITS Best Bid (for a sell order) for a Time Out Period (as defined

below). Once stopped, the order shall be guaranteed an execution at the

stopped price or better. The Time Out Period shall be the time

specified by the specialist, and approved by the Exchange, on a

security-by-security basis. Such Time Out Period may be changed by a

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

30 seconds. If a specialist does not specify a specific Time Out

Period, the Time Out Period shall be 30 seconds.

(ii) In the event that a small agency market order to buy or sell

is received in a security in which Enhanced SuperMAX has been enabled,

and the order is not stopped under (1)(i) above, Enhanced SuperMAX

shall immediately execute the order at the ITS Best Offer (for a buy

order) or at the ITS Best Bid (for a sell order).

(2) Pricing.

(i) In the event that an order has been stopped in accordance with

subsection (1)(i) above, it shall be executed at \1/16\th of a point

better than the stopped price immediately after the first (i.e., next)

primary market sale that occurs during the Time Out Period, but only if

such next primary market sale is at least \1/8\th of a point lower than

(for a buy order) or higher than (for a sell order) the stopped price.

(ii) In the event that an order has been stopped in accordance with

subsection (1)(i) above, it shall be executed at the stopped price

immediately after the first (i.e., next) primary market sale that

occurs during the Time Out Period, but only if such next primary market

sale is less than \1/8\th of a point lower than (for a buy order) or

higher than (for a sell order) the stopped price.

(iii) in the event that an order has been stopped in accordance

with subsection (1)(i) above, it shall be executed at the stopped price

immediately at the end of the applicable Time Out Period if no sale of

the security has occurred in the primary market during such Time Out

Period.

(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 of the Primary

trading Session. A specialist may enable or remove Enhanced SuperMAX

for a particular security only on one given day each month, as

determined by the Exchange from time to time. Notwithstanding the

previous sentence, during unusual market conditions, individual

securities or all securities may be removed from Enhanced SuperMAX with

approval of two members of the Committee on Floor Procedure.

(4) Timing.

Orders entered into Enhanced SuperMAX shall be immediately executed

upon completion of the algorithm 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, (iii) it

is an order for 200 shares or less, and (iii) it is an OLES passively

driven, system-generated market order (and not an activity managed

order).

(6) Out of Range.

Notwithstanding anything herein to the contrary, Enhanced SuperMAX

will not automatically execute an order if such execution would result

in an out of range execution.

(7) Other.

Any eligible order in a security 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 (1) and (2) above. In the event that a contra

side order which would better a 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.

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 Exchange 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

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

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The CHX now proposes to amend the SuperMAX program and Enhanced

SuperMAX programs. SuperMAX and Enhanced SuperMAX are two existing CHX

programs within the MAX System that use computerized algorithms to

provide automated price improvement. Both of these programs have been

approved by the Commission on a permanent basis.\3\

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\3\ See Securities Exchange Act Release No. 32631 (July 14,

1993), 58 FR 39069 (July 21, 1993) (File No. SR-MSE-93-10) (Order

approving SuperMAX on a permanent basis), Securities Exchange Act

Release No. 38338 (February 26, 1997), 62 FR 10102 (March 5, 1997)

(File No. SR-CHX-97-02) (Order approving Enhanced SuperMAX on a

permanent basis).

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Background. In 1997, virtually every registered national securities

exchange and national securities association changed its minimum

trading variation to one sixteenth of a point or smaller. Although the

CHX made some technical changes to its SuperMAX and Enhanced SuperMAX

programs at that time in light of assumptions as to the smallest

minimum variation that were contained in the text of the SuperMAX and

Enhanced SuperMAX rules, the CHX did not change the algorithms to

reflect the additional price improvement opportunities that are

available because of trading in sixteenths.\4\ The purpose of the

proposed rule change is to amend the existing programs to both simplify

the price improvement algorithms and increase the number of orders that

are eligible for price improvement due to the smaller minimum trading

variation. Rather than amending the existing text of the SuperMAX and

Enhanced SuperMAX rules, the text of the existing rule has been deleted

and replaced with new language. This was done to permit the Exchange to

re-write the rule, with non-substantive changes, to clarify some

language in the old rule that may have been ambiguous.

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\4\ See Securities Exchange Act Release No. 38816 (July 3,

1997), 62 FR 37325 (July 11, 1997) (File No. SR-CHX-97-18).

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Proposal. The existing SuperMAX and Enhanced SuperMAX programs are

voluntary programs in which a specialist may choose to participate.

Participation is on a security-by-security

[[Page 29281]]

basis and is currently limited to Dual Trading System issues (i.e.,

issues traded on both the CHX and either the New York Stock Exchange or

American Stock Exchange). A specialist can only activate and de-

activate the program with respect to a given security once a month (a

date determined by the specialist). Once activated with respect to a

security, small agency market orders \5\ in markets quoted with a

spread of \1/4\ point or more are eligible for automated price

improvement. Once eligible, the program runs through an algorithum that

may provide price improvement under certain circumstances. The existing

SuperMAX program provides price improvement to the order if executing

the order at the ITS BBC \6\ (the ITS best offer for a buy order, and

the ITS best bid for a sell order) would create either a double uptick

or double down tick based on the last primary market sale. The program

also provides price improvement if such an execution would result in

greater than a \1/8\th point price change from the last primary market

sale. Under the existing Enhanced SuperMAX program, rather than

executing an order based on the last primary market sale, eligible

orders are ``stopped'' at the ITS BBO and are executed with reference

to the next primary market sale. The Enhanced SuperMAX program also

includes a time-out feature whereby 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 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.

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\5\ For SuperMAX, small agency market orders are orders from 100

shares to 599 shares (or a greater amount chosen by the specialist).

For Enhanced SuperMAX these are orders from 100 shares to 1099

shares (or a greater amount chosen by the specialist).

\6\ As used in the CHX rules, ITS BBO means the best bid or

offer among the American, Boston, Cincinnati, Chicago, New York,

Pacific, Philadelphia or the Intermarket Trading System/Computer

Assisted Execution System quote. See CHX Art. XX, Rule 37(a)(2).

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This proposed rule change simplifies the pricing algorithms used by

SuperMAX and Enhanced SuperMAX and provides a greater opportunity for

price improvement.

Under the new simplified algorithm for SuperMAX, small agency

market orders \7\ would now be eligible for price improvement if the

market for the security is quoted with a spread of \1/8\ of a point or

greater (rather than the \1/4\ point spread that is required under the

existing rule). In addition, the double-up/double down concept has been

eliminated. The simplified algorithm will now provide 1\1/16\th of a

point price improvement from the ITS BBO if an execution at the ITS BBO

would be at least \1/8\th point higher than (for a buy order) or lower

than (for a sell order) the last primary market sale. Basically price

improvement is given under certain circumstances when the security is

trading between the spread. All other aspects of the existing

algorithm, including operating time, timing of execution, applicability

to odd-lots, and out of range situations, remain the same.

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\7\ Under the proposal, small agency market orders for SuperMAX

would be orders from 100 shares to 499 shares (or a greater amount

chosen by the specialist).

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The Exchange has compared the proposed changes to SuperMAX with the

existing SuperMAX algorithm and believes that the new algorithm will

provide price improvement to a greater number of trades. Using data for

January 1998, the Exchange determined that the proposed changes to the

algorithm would have resulted in over 32,000 trades receiving price

improvement (for a total savings of $329,000 to customers), as opposed

to the 5800 trades that received price improvement (for a total savings

of $126,000 to customers) under the existing SuperMAX program. This

means that the changes to SuperMAX would have resulted in customers

receiving 203,000 additional dollars of price improvement over the

Exchange's existing SuperMAX algorithm.

With respect to Enhanced SuperMAX, the Exchange proposes to make

this program an add-on feature for securities for which the SuperMAX

program has already been activated, rather than a stand-alone program.

As stated in the Exchange's Report on the operation of the Enhanced

SuperMAX program that was provided to the Commission in advance of the

Commission's permanent approval of Enhanced SuperMAX program, taken as

a whole, the existing SuperMAX program provides more price improvement

than the existing Enhanced SuperMAX program. The Exchange believes that

interconnecting the two programs will encourage more specialists to

enable the SuperMAX program, with greater resulting price improvement,

since the Enhanced SuperMAX program will only be available when

SuperMAX is enabled. Currently, some specialists have only turned on

the Enhanced SuperMAX program without enabling the SuperMAX program.

Under the new simplified algorithm for Enhanced SuperMAX, small

agency market orders \8\ would be eligible for price improvement if the

market for the security is quoted with a spread of \3/16\th

of a point (rather than the \1/4\ point spread that is required under

the existing rule). In addition, the double-up/double down concept

currently in place to determine whether an order is stopped has been

eliminated. The simplified algorithm will now ``stop'' an eligible

order at the ITS BBO if an execution at the ITS BBO would be at least

\1/18\th point higher than (for a buy order) or lower than

(for a sell order) the last primary market sale. (This stopping

algorithm is identical to the new algorithm above for Super MAX.) Once

stopped, an order would receive \1/16\th price improvement

over the stopped price if the next primary market sale occurs before

the end of the Time Out Period and the sale is at least \1/

8\th of a point lower than (for a buy order) or higher than

(for a sell order) the stopped price. As is the case for SuperMAX, all

other aspects of the existing algorithm, including operating time,

timing of execution, applicability to odd-lots, and out of range

situations, remain the same.

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\8\ Under the proposal, small agency market orders for Enhanced

SuperMAX would be orders from 500 shares to 2099 shares (or a

greater amount chosen by the specialist). Notwithstanding the 500

share minimum order size contained in the rule, the smallest size

order eligible for Enhanced SuperMAX must always be at least one

share greater than the largest size order in such security that is

eligible for SuperMAX. In other words, if a specialist voluntarily

increases the maximum order size for SuperMAX, the minimum order

size for Enhanced SuperMAX must be increased accordingly.

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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. The proposed rule change

accomplishes these ends by increasing the number of trades that will be

eligible for automated price improvement.

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

The Exchange does not believe that the proposed rule change will

impose any inappropriate 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 either solicited or received.

[[Page 29282]]

III. 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. 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. 552, will be available for inspection and copying at the

Commission's Public Reference Room. 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-98-09 and

should be submitted by June 18, 1998.

IV. Date of Effectiveness of the Proposed Rule Change and Timing

for Commission Action

Within 35 days of the publication of the 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 such proposed rule change, or

B. Institute proceedings to determine whether the proposed rule

change should be disapproved.

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

Proposed Rule Change

The Commission finds that part of the Exchange's proposal modifying

the price improvement algorithm amending SuperMAX is consistent with

the requirements of the Act and the rules and regulations thereunder

applicable to a national securities exchange. Specifically, the

Commission finds that the proposed rule change is consistent with

Section 6(b)(5) of the Act,\9\ which requires that the rules of an

exchange be designed, among other things, 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.\10\ The Commission believes,

in light of the industry's move to trading in finer increments last

year, that CHX's modification to its price improvement algorithms will

provide investors a meaningful opportunity for price improvement when

securities trading in \1/16\ths have a spread of \1/8\ point or

greater. In addition, the Commission finds that the new SuperMAX and

Enhanced SuperMAX rules provide greater price improvement opportunities

for investors because the criteria for when such opportunities are

available has been simplified. The Commission believes that because the

opportunity for price improvement is automatic and without any

specialist intervention, SuperMAX \11\ and Enhanced SuperMAX facilitate

order interaction and enhance the execution of customer orders

consistent with Section 6(b)(5) of the Act. The Commission notes that

while SuperMAX and Enhanced SuperMAX are voluntary programs that

specialists choose to participate in for Dual Trading Systems issues,

providing a greater number of investors an opportunity to achieve price

improvement is compatible with the view expressed in the Order Handling

release.\12\

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\9\ 15 U.S.C. 78f(b)(5).

\10\ In approving this rule, the Commission notes that it has

also considered the proposed rule's impact on efficiency,

competition, and capital formation. 15 U.S.C. 78c(f).

\11\ The CHX presently has the ability to install the new

SuperMAX algorithm.

\12\ See Securities Exchange Act Release No. 37619A (September

6, 1996), 61 FR 48290 (September 12, 1996).

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The Commission therefore finds good cause for granting partial

approval to the proposed rule change (SR-CHX-98-09) with respect to the

adoption of a new SuperMAX prior to the thirtieth day after date of

publication of notice of filing thereof in the Federal Register. The

Commission is granting this partial approval on a temporary basis,

until August 20, 1998.

The Commission is therefore granting accelerated approval for the

new SuperMAX algorithm on a temporary basis, until August 20, 1998.\13\

The Commission is deferring action on the new Enhanced SuperMAX to

provide interested parties an opportunity to comment on the proposal.

In addition, the Commission and the CHX will have the opportunity to

review the implementation of the new SuperMAX algorithm.

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\13\ The proposal to permanently adopt the new SuperMAX will be

considered with the proposal to approve the adoption of the new

Enhanced SuperMAX.

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The changes to the SuperMAX algorithm will be phased in during the

next month. Until the Enhanced SuperMAX proposal is adopted, the

existing Enhanced SuperMAX algorithm will continue to apply. In those

instances where a security is both on the new SuperMAX algorithm and

the old Enhanced SuperMAX algorithm, the size of the order will

determine which algorithm is used. The introductory paragraph of

existing Rule 37(e) that describes the interaction between SuperMAX and

Enhanced SuperMAX for a security on both systems shall be deemed to be

amended such that if an order is for between 100 shares and 499 shares,

the new SuperMAX algorithm shall apply, and if the order is for 500

shares or more (up to the 2099 shares or such greater amount specified

by the specialist and approved by the Exchange), the old Enhanced

SuperMAX algorithm shall apply.

It is Therefore Ordered, pursuant to Section 19(b)(2) of the

Act,\14\ that the proposed rule change (SR-CHX-98-09) be, and hereby

is, approved in part and on a temporary basis.

\14\ 15 U.S.C. 78s(b)(2).

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For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\15\

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\15\ 17 CFR 200.30-3(1)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98-14113 Filed 5-27-98; 8:45 am]

BILLING CODE 8010-01-M