

[Federal Register: October 28, 2005 (Volume 70, Number 208)]
[Notices]               
[Page 62151-62152]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28oc05-78]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 52652; File No. SR-CHX-2004-17]

 
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Approving Proposed Rule Change To Amend Article XX, Rule 37(a)(3) 
To Eliminate its Requirement That Specialists Guarantee Execution of 
Limit Orders When Certain Conditions Occur in Another Market

October 21, 2005.

I. Introduction

    On June 21, 2004, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend Article XX, Rule 37(a)(3) of its rules to 
permit, rather than require, CHX specialists to guarantee execution of 
limit orders when certain conditions occur in another market. On July 
5, 2005, the CHX filed Amendment No. 1 to the proposed rule change.\3\ 
The proposed rule change, as amended, was published for comment in the 
Federal Register on July 14, 2005.\4\ The Commission received no 
comments on the proposal. This order approves the proposed rule change, 
as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Amendment No. 1.
    \4\ See Securities Exchange Act Release No. 51997 (July 8, 
2005), 70 FR 40760.
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II. Description of the Proposal

    The Exchange proposes to amend Article XX, Rule 37(a)(3), which 
provides for execution of resting limit orders based on activity in 
other markets, to eliminate the requirement that CHX specialists 
guarantee execution of such limit orders when certain conditions occur 
in another market. For listed issues, the current rule generally 
obligates a CHX specialist to guarantee execution of limit orders 
resting in the specialist's book when the issue is being traded in the 
primary market at a price equal to or better than the limit price. [For 
Nasdaq securities, the rule permits, but does not require, a CHX 
specialist to guarantee execution of limit orders resting in the 
specialist's book, when another market center's quotation locks or 
crosses the limit price.] The CHX represents that the guarantees set 
forth in Article XX, Rule 37(a)(3), commonly referred to as ``limit 
order protection'' or ``primary market protection,'' were voluntarily 
adopted by the Exchange over 15 years ago to attract order flow.
    Under the proposed revision to Article XX, Rule 37(a)(3), the 
mandate that CHX specialists guarantee execution of resting limit 
orders for listed issues, based on triggering activity in other 
markets, would be deleted. Instead, the amended rule would permit CHX 
specialists to continue to provide such limit order protection 
guarantees solely on an issue-by-issue basis, on non-discriminatory 
terms approved by the Exchange. The Exchange's existing functionality 
providing for automated execution of resting limit orders would remain 
available for CHX specialists who elect to continue to guarantee limit 
order protection.\5\
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    \5\ The CHX anticipates that for the foreseeable future, CHX 
specialists would continue to provide limit order protection 
voluntarily using the criteria for limit order protection previously 
set forth in Article XX, Rule 37(a)(3). Should the CHX receive a 
request from a specialist to alter the voluntary limit order 
protection criteria and agree to alter the functionality, the 
Exchange will notify all CHX participants of the change. The 
Commission believes any such change would need to be filed pursuant 
to Section 19(b) of the Act.
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    The CHX provided the following rationale for the proposed rule 
change. First, as the industry has evolved, the Exchange's principal 
competitors for order flow, namely ``third market'' execution venues 
and alternative trading systems, do not provide comparable limit order 
protection guarantees. In addition, CHX order-sending firms now have 
free access to comprehensive monthly order execution

[[Page 62152]]

quality statistics; thus, the CHX believes that ``front-end'' execution 
guarantees are no longer necessary to attract order flow. Accordingly, 
the Exchange believes that the guarantee no longer serves a clear 
competitive purpose. Secondly, since the securities industry converted 
to decimal trading, the availability of liquidity at a best bid or 
offer price has declined, making it difficult for the CHX specialist, 
who chooses to offset his positions in another market, to access 
liquidity at the price the rule requires him to provide. Consequently, 
the Exchange believes it is no longer appropriate to mandate that 
specialists guarantee execution of resting limit orders for listed 
issues based on activity in other market centers.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange \6\ and, in 
particular, the requirements of Section 6(b)(5) of the Act \7\ because 
it is designed to promote just and equitable principles of trade, 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. The Commission agrees that the 
environment has changed significantly since the Exchange voluntarily 
enacted its rule-based execution guarantees, and that consequently, the 
guarantees may no longer serve to foster competition between the 
markets.
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    \6\ In approving this proposed rule change, as amended, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(5).
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    However, the Commission emphasizes that the deletion of the rule-
based mandate regarding limit order protection does not in any way 
affect a CHX specialist's obligation to provide best execution, nor 
would it modify any other specialist obligations set forth in Article 
XXX of the CHX Rules. The Exchange must continue its surveillance of 
order executions to ensure that CHX specialists meet all of their 
obligations to each order. The Commission further emphasizes that, to 
the extent limit order protection guarantees are provided on a 
voluntary, issue-by-issue basis, such guarantees would have to be 
provided on a non-discriminatory basis.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-CHX-2004-17), as amended, be, 
and it hereby is, approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    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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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-5972 Filed 10-27-05; 8:45 am]

BILLING CODE 8010-01-P
