Self-Regulatory Organizations; Notice of Filing and Order Granting Partial Accelerated Approval of Proposed Rule Change by the Chicago Stock Exchange, Inc. Relating to the Automatic Stopping of Market Orders

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40687; File No. SR-CHX-98-21]

Self-Regulatory Organizations; Notice of Filing and Order

Granting Partial Accelerated Approval of Proposed Rule Change by the

Chicago Stock Exchange, Inc. Relating to the Automatic Stopping of

Market Orders

November 18, 1998.

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

(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that

on August 31, 1998, 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 Exchange. The

Commission is publishing this notice to solicit comments on the

proposed rule change from interested persons and to grant partial

accelerated approval of the proposed rule change.

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

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

\2\ 17 CFR 240.19b-4.

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

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

Substance of the Proposed Rule Change

The exchange proposes to amend Article XX, Rule 37(b) relating to

the Exchange's ``pending auto stop'' program that automatically stops

market orders under certain circumstances. The text of the proposed

rule change is available at the Office of the Secretary, the CHX, and

at the Commission.

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 IV below. The Exchange 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 July 13, 1998, the Commission approved a rule change that: (i)

Automates the stopping of certain market orders, and (ii) permits

specialists to manually stop marketable limit orders received through

the Midwest Automated Execution System (``MAX System'').\3\ This

program for automated stopping of market orders is known as the

``pending auto stop'' program.

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

\3\ Securities Exchange Act Release No. 41096 (July 13, 1998),

63 FR 38866 (July 20, 1998).

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

Under the pending auto stop program, all MAX System market orders

that are between 100 and 599 shares (or a higher amount chosen by a

specialist on a stock by stock basis) and that are not automatically

executed in the normal course of operations (i.e., because there is

insufficient size associated with the Intermarket Trading System

(``ITS'') best bid or offer (``BBO''), because the order would result

in an out of range execution,\4\ or because the order is a professional

order\5\ and the specialist has not yet decided whether to accept the

order, etc.) are identified as ``pending auto stop'' orders.\6\

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

\4\ An out of range execution is an execution that results in a

new high or a new low for the day.

\5\ The term ``professional order'' is defined as any order for

the account of a broker-dealer, or any account in which a broker-

dealer or an associated person of a broker-dealer has any direct or

indirect interest. See CHX, Art. XXX, Rule 2, interpretation and

policy .04. The term ``agency order'' means an order for the account

of a customer, but does not include professional orders.

\6\ Both agency and professional orders are currently eligible

for the ``pending auto-stop'' feature of MAX; however, all or none

orders, odd-lot orders, fill or kill orders, immediate or cancel

orders, orders that are or will be stopped under the Enhanced

SuperMAX program, and other orders that cannot be entered into the

MAX System (i.e., not held orders, sell short exempt orders and

special settlement orders) will not be eligible to be ``pending auto

stop'' orders.

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

[[Page 65624]]

These orders retain their ``pending auto-stop'' status for 30

seconds. At the end of this 30 second period, the MAX System

automatically stops the order and sends a ``UR Stopped'' message to the

firm that sent the order, unless, before the end of the 30 second

period, the specialist manually executes, cancels or stops the entire

order or the specialist puts the order ``on hold.'' If any of these

events occurs, the ``pending auto-stop'' status is removed from the

order and the order is not automatically stopped. If an order is ``put

on hold,'' the CHX's existing rules for order handling apply.\7\ If the

order is automatically stopped, the stop price currently is the ITS BBO

at the time the order is received in the MAX System. Furthermore, if

the order is automatically stopped, the entire order is stopped. The

``pending auto-stop'' feature of the MAX System currently operates from

8:45 a.m. until 2:57 p.m.

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

\7\ See CHX, Article XX, Rules 28 and 37(a).

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

Although the Exchange has only limited experience operating under

the pending auto stop program, the Exchange believes that it is

appropriate to amend certain aspects of the program. In general, the

proposed rule change limits the operation of the program under certain

circumstances. The proposed rule change would: (1) Eliminate securities

trading at or above $100 at the time the order is received from being

eligible for the program; (2) change the hours of the program so that

it will operate from 9 a.m. until 2:30 p.m., Central Time; (3)

eliminate professional orders from being eligible for the program; and

(4) change the stop price from the ITS BBO to the primary market price

when the size associated with the relevant side of the ITS BBO is 100

shares.

The Exchange believes that it is appropriate to limit the operation

of the pending auto stop program to a typical trading environment. Each

of the above cases involve unique situations. In addition, under the

current program, specialists have the ability to manually override the

pending auto stop feature. The Exchange believes limiting the pending

auto stop program to a typical trading environment alleviates the

burden placed on the specialist to continuously monitor orders in the

above cases, and if necessary, place the orders on ``hold.'' Each of

the proposed changes is discussed in turn.

a. Securities Trading at or Above $100

The Exchange proposes to exclude securities trading at or above

$100 at the time the order is received from the pending auto stop

program. The CHX states that highly priced securities trade in a manner

and in an environment that is different from other lower priced

securities. In addition, these securities are geared more toward the

institutional market and often are traded with wider spreads, among

other things, making them inappropriate for a program that

automatically stops the order.

b. Change in Hours of Operation of the Program

Currently, the pending auto stop program operates from 8:45 a.m. to

2:57 p.m., Central Time. As proposed, the pending auto stop program

would operate from 9 a.m. to 2:30 p.m., Central Time. The Exchange

believes that the periods surrounding the opening and closing are both

the most busy and, often, the most volatile periods of the day that

require the most amount of specialist attention and action. Having an

automatic program that requires the specialist to review these orders

and, if necessary, put orders on hold, within 30 seconds during this

time period puts undue strain on the specialist's resources by

diverting the specialist from his or her core job function of

maintaining a fair and orderly market at a time when this function is

most critical.

c. Professional Orders

The vast majority of orders received on the Exchange floor through

the MAX system are retail sized agency orders.\8\ Giving these customer

orders executions that are quicker and better than other market centers

is an important priority for the Exchange. The pending auto stop

program is targeted specifically at these types of orders. Although

trading conditions change throughout the day, the Exchange believes

that implementing the pending auto stop program in a manner that

requires the least amount of specialist intervention will result in the

greatest use of the program and, as a result, the greatest benefit to

customers. If specialists believe that the program is sufficiently

limited to those orders for which the pending auto stop program is most

appropriate, they will be less likely to put orders on hold to evaluate

and examine the orders in more detail. Given this philosophy, the

Exchange believes that it is appropriate to remove professional orders

from the program. Professional orders are not subject to the Exchange's

Article XX, Rule 37(a) (``BEST Rule''),\9\ or any similar guarantee, if

stopped. The Exchange no longer believes that it is appropriate, at

this time, to give these orders a better guarantee merely because they

are stopped under the pending auto stop program.

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

\8\ The term ``agency order'' means an order for the account of

a customer, but does not include professional orders defined in CHX,

Art. XXX, Rule 2, interpretation and policy .04.

\9\ Under the Exchange's BEST Rule, Exchange specialists are

required to guarantee executions of all agency market and limit

orders for Dual Trading Systems issues (issues traded on the CHX,

through listing on the CHX or unlisted trading privileges and also

listed on either the New York Stock Exchange or the American Stock

Exchange) from 100 shares up to and including 2099 shares.

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

d. Use of Primary Market as Stopped Price

Currently, when an order is stopped under the pending auto stop

program, the order is stopped at the relevant side of the ITS BBO in

existence at the time the order is first received. Under the existing

pending auto stop program, an entire order is stopped regardless of the

size associated with the ITS BBO. Thus, a 599 share order that is

eligible for the pending auto stop program is stopped for 599 shares,

even if the ITS BBO is only for 100 or 200 shares. As stated above,

this results in better guarantees for the order than are required under

the BEST Rule.

The Exchange proposes to change the stop price for an order under

the pending auto stop program from the ITS BBO to the primary market

quote when the size associated with the relevant side of the ITS BBO is

100 shares. In all other cases, the stop price will remain the ITS BBO.

Because the guarantee under the pending auto stop program does not

depend on the size of the ITS BBO, the Exchange believes that it is

appropriate to exclude 100 share markets for purposes of determining

the stop price. In most instances, 100 share markets are not an

appropriate indicator of where to stop orders under the pending auto

stop program, especially when the execution guarantee is for the full

size of the order, notwithstanding the 100 share market being

displayed. Thus, in instances where the size of the ITS BBO is 100

shares, the Exchange believes that the most appropriate indicator of

the price at which to stop the entire order is the primary market bid

and offer.

2. Statutory Basis

The Exchange believes that the proposed rule change is consistent

with section 6(b)(5) of the Act \10\ in that it is designed to promote

just and equitable principles of trade, to remove impediments to and to

perfect the

[[Page 65625]]

mechanism of a free and open market and a national market system, and,

in general, to protect investors and the public interest.

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

\10\ 15 U.S.C. 78f(b)(5).

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

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

The Exchange does not believe that the proposed rule change will

impose any burden on competition.

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

Proposed Rule Change Received from Members, Participants or Others

The Exchange has neither solicited nor received written comments on

the proposed rule change.

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 Exchange 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.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and

arguments concerning the foregoing, including whether the foregoing is

consistent with the Act. 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

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 CHX. All

submissions should refer to File No. SR-CHX-98-21 and should be

submitted by [insert date 21 days from the date of publication].

V. Commission's Findings and Order Granting Partial Accelerated

Approval of the Proposed Rule Change

After careful review, the Commission finds that the proposed rule

change, as it pertains to: (1) Excluding securities at or above $100 at

the time of the trade from the pending auto program; (2) changing the

time of operation of the pending auto stop program; and (3) excluding

professional orders from the pending auto stop program, is consistent

with the requirements of the Act.\11\ and the rules and regulations

thereunder applicable to a national securities exchange.\12\ In

particular, the Commission believes that these three aspects of the

proposed rule change are consistent with section 6(b)(5) of the Act

\13\ requiring that the rules of an exchange be designated to promote

just and equitable principles of trade, to prevent fraudulent and

manipulative acts, and, in general, to protect investors and the public

interest. The Commission believes that approving a portion of the

proposed rule change should streamline the operation of the pending

auto stop program and increase the efficiency and productivity of

specialists operating within the program. The Commission believes it is

appropriate to exclude securities that are at or above $100 at the time

of the trade from the program because of the CHX's representation that

such securities tend to trade in an environment different from lower

priced securities. Higher priced securities are generally traded by

institutional investors with wider spreads. According to the Exchange,

wider spreads may deplete a stock's liquidity and require a specialist

to risk larger amounts of capital. The Exchange represents that these

factors could divert specialist attention away from smaller public

customer orders, defeating a primary goal of the pending auto program.

Thus, the Commission believes that excluding securities that are at or

above $100 at the time of trade should streamline the program and

enhance efficiency.\14\

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

\11\ In approving this rule change, the Commission has

considered the proposed rule's impact on efficiency, competition,

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

\12\ The portion of the proposed rule change relating to the use

of the primary market as the stopped price will be subject to the

full notice and comment period described in Item IV.

\13\ Id.

\14\ The Exchange represents that very few of the securities in

the pending auto stop program are at or above $100 at the time of

trade. Telephone conversation between David Rusoff, Counsel, Foley &

Lardner, and Marc McKayle, Attorney, Division of Market Regulation,

Commission (October 30, 1998).

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

The Commission also believes that changing the hours of operation

for the pending auto stop program from 8:45 a.m. to 2:57 p.m. to 9 a.m.

to 2:30 p.m. should allow specialists to focus on their primary duties

at the opening and closing of the business day when trading is often

most busy and most volatile. The Commission believes that changing the

pending auto stop program's hours of operation to alleviate the

specialists' duties during the increased activity often associated with

the opening and closing of the business day should contribute to the

maintenance of a fair and orderly market.

The Commission also believes that eliminating professional orders

from the pending auto stop program should benefit the individual and

retail investors who are the focus of the program. Professional orders

are not subject to the BEST Rule, and have a direct or indirect broker-

dealer interest. The Commission believes that the exclusion of

professional orders should appropriately streamline the program and

help maintain a focus on agency orders which are subject to the BEST

Rule. Thus, the Commission believes that eliminating professional

orders from the program should enhance the Exchange's ability to meet

its stated goal of achieving superior customer executions. Accordingly,

the Commission finds good cause for partially approving the proposed

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

notice of filing thereof in the Federal Register.

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

Act,\15\ that the proposed rule change (SR-CHX-98-21) as it pertains

to: (1) Excluding securities at or above $100 at the time of the trade

from the pending auto program; (2) changing the time of operation of

the pending auto stop program; and (3) excluding professional orders

from the pending auto stop program is hereby approved on a accelerated

basis.

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

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\16\

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

\16\ 17 CFR 200.30-3(a)(12).

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

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98-31584 Filed 11-25-98; 8:45 am]

BILLING CODE 8010-01-M