Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 by The Chicago Stock Exchange, Incorporated Relating to Oversized MAX Orders

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39615; File No. SR-CHX-97-32]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change and Amendment No. 1 by The Chicago Stock Exchange, Incorporated

Relating to Oversized MAX Orders

February 3, 1998.

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

(``Act''),\1\ notice is hereby given that on December 9, 1997, the

Chicago Stock Exchange, Incorporated (``CHX'' or ``Exchange'') filed

with the Securities and Exchange Commission (``Commission'') a proposed

rule change. On January 9, 1998, the Exchange submitted to the

Commission Amendment No. 1 to the proposal. The proposed rule change,

as amended, is 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.

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\1\ 15 U.S.C. Sec. 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 Article XX, Rule 37(b)(1) and

proposes to add interpretation and policy .06 thereunder relating to

the entry and acceptance of oversized orders in the Exchange's Midwest

Automated Execution System (``MAX System'').\2\ Below is the text of

the proposed rule change. Proposed new language is italicized;

deletions are in brackets.

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\2\ The MAX System provides an automated delivery and, in

certain cases, execution facility for orders that are eligible for

execution under the Exchange's BEST Rule, Art. XX, Rule 37(a), and

certain other orders. See CHX Manual, Art. XX, Rule 37(b).

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Article XX Rule 37

(b)(1) Size. The MAX System has two size parameters which must be

designated by the specialist on a stock-by-stock basis. The first

parameter, the auto-execution threshold, must be set at 1099 shares

(the default size) or greater for Dual Trading System issues. The

second parameter, the auto-acceptance threshold, must be set at 2099

shares (the system default) or greater for Dual

[[Page 7021]]

Trading System issues. In NASDAQ/NM Securities, the auto-execution and

auto-acceptance parameters must be set at 1000 shares or greater. In no

event may the auto-acceptance threshold be less than the auto-execution

threshold. If the order sending firm sends an agency market order

through MAX that is greater than the Specialist's auto-acceptance

threshold, a Specialist may cancel the order within [three minutes] one

minute of its being entered into MAX. If not canceled by the

Specialist, the order will be designated as an open order. If the order

sending firm sends an agency market order through MAX that is less than

the auto-acceptance threshold but greater than the auto-execution

threshold, the order will not be available for automatic execution but

will be designated in the open order book. A specialist may manually

execute any portion of such order and the difference shall remain as an

open order. If the order sending firm sends an agency market order

through MAX that is less than or equal to the auto-execution threshold,

such order will be automatically executed in accordance with paragraph

(b)(6) and (7) of this Rule.

* * * Interpretations and Policies

.06 Oversized MAX Orders.

As stated in paragraph (b)(1) of this Rule, if an agency order is

sent through MAX that is greater than the specialist's auto-acceptance

threshold, the specialist shall follow the procedures set out below in

a timely manner, but in no event great than one minute, until the order

has either been definitively accepted or canceled:

1. If the oversized order is a limit order and the limit price is

equal to or better than the specialist's quote, the order must be

immediately reflected in the specialist's quote in accordance with Rule

7 of this Article XX.

2. The oversized order must receive post protection until its final

status is determined.

3. A specialist must notify the order sending firm's MAX floor

broker representative if the specialist determines to cancel the order.

II. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the self-regulatory organization

included statements concerning the purpose of and basis for the

proposed rule change and discussed any comments it received on the

proposed rule change. The text of these statements may be examined at

the places specified in Item IV below. The self-regulatory organization

has prepared summaries, set forth in 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

As described more fully below, the purpose of the proposed rule

change is to amend CHX rules relating to the entry and acceptance of

oversized orders received through the MAX System. Under the Exchange's

BEST Rule, Exchange specialists are required to guarantee executions of

all agency \3\ market and limit orders for Dual Trading System issues

\4\ from 100 shares up to and including 2099 shares. Subject to the

requirements of the short sale rule, market orders must be executed on

the basis of the Intermarket Trading System's (``ITS'') best bid or

offer (``BBO''). Limit orders must be executed at their limit price or

better when: (1) The ITS BBO at the limit price has been exhausted in

the primary market; (2) there has been a price penetration of the limit

in the primary market (generally known as a trade-through of a CHX

limit order); or (3) the issue is trading at the limit price on the

primary market unless it can be demonstrated that the order would not

have been executed if it had been transmitted to the primary market or

the broker and specialist agree to a specific volume related to, or

other criteria for, requiring an execution.

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\3\ The term ``agency order'' means an order for the account of

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

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

defines a ``professional order'' 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. Id.

\4\ Dual Trading System Issues are issues that are traded on the

CHX, either through listing on the CHX or pursuant to unlisted

trading privileges, and are also listed on either the New York Stock

Exchange or American Stock Exchange.

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As stated above, the Exchange's MAX System provides for the

automatic execution of orders that are eligible for execution under the

Exchange's BEST Rule and certain other orders.\5\ The MAX System has

two size parameters which must be designated by the specialist on a

stock-by-stock basis. For Dual Trading System issues, the specialist

must set the auto-execution threshold at 1099 shares or greater and the

auto-acceptance threshold at 2099 shares or greater. In no event may

the auto-acceptance threshold be less than the auto-execution

threshold. If the order-entry firm sends an order through MAX that is

less than or equal to the auto-execution threshold, the order is

executed automatically, unless an exception applies. If the order-entry

firm sends an order through MAX that is less than the auto-acceptance

threshold but greater than the auto-execution threshold, the order is

not available for automatic execution but is designated in the open

order book. A specialist may manually execute any portion of the order;

the difference must remain as an open order. Under the current MAX

rules, if the order-entry firm sends an order through the MAX System

that is greater than the specialist's auto-acceptance threshold, a

specialist may cancel the order within three minutes of it being

entered into MAX. If not canceled by the specialist, the order is

designated as an open order.\6\

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\5\ A MAX order that fits under the BEST parameters must be

executed pursuant to BEST Rules via the MAX system. If the order is

outside the BEST parameters, the BEST Rules do not apply, but MAX

system handling rules do apply.

\6\ Under current rules, if an oversized market or limit order

is received by the specialist, he must either reject the order

immediately or immediately display it in accordance with CHX rules

and the Commission's Order Execution Rules (Securities Exchange Act

Release No. 37619A (Sept. 6, 1996), 61 FR 48290 (Sept. 12, 1996)).

If the order is displayed, the specialist must check with the order

entry broker to determine the validity of the oversized order.

During the three minute period, the specialist can cancel the order

and return it to the order entry firm, but until it is canceled the

displayed order is eligible for execution.

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The Exchange proposes to change the way that these oversized orders

are handled. First, the Exchange proposes to amend Rule 37(b)(1) of

Article XX to change the amount of time in which the specialist can

cancel the oversized order. Rather than the current three minute

window, the Exchange proposes to reduce this time period to one minute.

If the specialist has not canceled the order in the one minute period,

the order will be designated as an open order.

Second, the Exchange proposes to add interpretation and policy .06

to Rule 37 to specifically describe how oversized orders are to be

handled during the one minute period in which the specialist can cancel

the order. The interpretation will provide that if the oversized order

is an agency limit order, the order must immediately be reflected in

the specialist's quote in accordance with CHX rules.\7\ Additionally,

during the one minute window, the order must receive post protection.

This means that while the BEST Rule will not apply

[[Page 7022]]

during this period, the specialist must allow the order to interact

with other orders received by the specialist at the post, using the

same priority and precedence rules that apply to other orders received

at the post.

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\7\ Article XX, Rule 7 of the CHX rules requires every limit

order that is priced at or better than the specialist's quote to be

included in the specialist's quote, subject to certain exceptions.

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Finally, during the one minute window, the specialist must notify

the order sending firm's MAX floor broker representative if the

specialist determines to cancel the order. The reduction of the three

minute window to one minute is appropriate because it will reduce the

time period in which the order sending firm will be uncertain as to the

ultimate status of the order. The imposition of specific duties on the

specialist during the one minute window is appropriate in order to both

make sure that the order is not disadvantaged during the one minute

period and to give the specialist an opportunity to verify with the MAX

floor broker representative that the order is accurate and correct.

2. Statutory Basis

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

Act \8\ 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.

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\8\ 15 U.S.C. 78f(b)(5).

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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.

III. Date of Effectiveness of the Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of publication of this notice in the

Federal Register or within such longer period (i) as the Commission may

designate up to 90 days of such date if it finds such longer period to

be appropriate and publishes its reasons for so finding or (ii) as to

which the self-regulatory organization consents, the Commission will:

A. by order approve the proposed rule change, or

B. institute proceedings to determine whether the proposed rule

change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and

arguments concerning the foregoing, 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-97-32 and

should be submitted by March 4, 1998.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\9\

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\9\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98-3370 Filed 2-10-98; 8:45 am]

BILLING CODE 8010-01-M