
[Federal Register Volume 74, Number 115 (Wednesday, June 17, 2009)]
[Notices]
[Pages 28739-28741]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-14146]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60083; File No. SR-CHX-2009-02]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change Relating to the Rejection of 
Undisplayed Odd-Lot Orders From the Exchange's Matching System

June 10, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\

[[Page 28740]]

notice is hereby given that on June 2, 2009, the Chicago Stock 
Exchange, Inc. (``CHX'' or the ``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 CHX. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \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 CHX proposes to amend its rules to allow Exchange customers to 
specify whether odd-lot orders and unexecuted odd-lot remainders, that 
are not able to be immediately displayed, should remain in, or be 
rejected from, the Exchange's Matching System. Additionally, the 
Exchange proposes to add a generic routing rule to clarify how any 
orders that are rejected from the Exchange's Matching System, and 
routed away according to Participant instructions, will be handled.\3\ 
The text of this proposed rule change is available on the Exchange's 
Web site at (www.chx.com) and in the Commission's Public Reference 
Room.
---------------------------------------------------------------------------

    \3\ The Exchange notes that while this rule is currently being 
added to clarify how undisplayed odd-lots that are rejected from the 
Matching System will be routed, the rule will apply to any orders 
that are rejected from the Matching System and routed according to 
Participant instructions.
---------------------------------------------------------------------------

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 CHX 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 CHX 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
    The Exchange proposes to amend CHX Article 20, Rule 8 to allow 
Exchange Participants to specify whether odd-lot orders and unexecuted 
odd-lot remainders, that are not able to be immediately displayed, 
should remain in, or be rejected from, the Exchange's Matching System. 
Additionally, the Exchange proposes to add a generic routing rule to 
clarify how any orders that are rejected from the Exchange's Matching 
System, and routed away according to Participant instructions, will be 
handled.
    Currently, odd-lot orders and unexecuted odd-lot remainders that 
are not able to be immediately displayed, because they are at a better 
price than the current CHX quote and have no other orders with which to 
aggregate, remain in the Exchange's Matching System until they are 
executed, are aggregated with another order and displayed \4\ or are 
cancelled. The proposed rule change would allow Exchange Participants 
to specify whether such orders should remain in, or be rejected from, 
the Exchange's Matching System. This preference could be set by the 
Participant on both a default and order by order basis.\5\ Orders 
remaining in the Matching System will continue to be ranked at the 
price and time at which they were originally received. Orders that are 
rejected from the Matching System shall either be sent back to the 
order sender or be routed to another destination according to each 
Participant's instructions \6\ or, if designated ``do not route,'' 
automatically cancelled. The Exchange also proposes that Participants 
that elect to have orders routed to another destination pursuant to 
this rule, or pursuant to Article 20, Rule 5 (``Prevention of Trade-
throughs''), agree to be bound by such transactions.
---------------------------------------------------------------------------

    \4\ The Exchange notes that odd-lot orders are aggregated with 
other odd-lot and mixed lot orders where possible to form round 
lots. Additionally, odd-lot orders are considered displayed when 
there are other round-lot orders at the same price point which are 
being displayed.
    \5\ This system functionality already exists and can be put into 
production once the necessary rule change is approved.
    \6\ The Exchange notes that orders rejected in accordance with 
this rule will be routed in the same manner as those rejected under 
the NMS trade-through validation rule (Exchange Article 20, Rule 5, 
Interpretations and Policies .03), which has already been approved 
by the Commission.
---------------------------------------------------------------------------

    Exchange Participants have requested this functionality to improve 
the certainty of order execution. For example, if a Participant enters 
a limit order to buy four hundred (400) shares into the Matching System 
and that order matches with an order to sell three hundred fifty (350) 
shares at the same price, the system would execute three hundred fifty 
shares leaving fifty (50) shares as an unexecuted odd-lot remainder. 
Currently, if there were no other round-lot orders at the same price, 
these shares would remain undisplayed in the Matching System; reducing 
the likelihood that the Participant would receive a timely execution on 
the remaining shares.\7\ Under the proposed rule change, the 
Participant would be able to specify that such orders be rejected from 
the Matching System and either cancelled or routed to another 
destination with which they have an agreement.
---------------------------------------------------------------------------

    \7\ This also assumes that there are no other odd-lots at the 
same price with which the odd-lot could aggregate to form a round 
lot. See footnote 4, supra.
---------------------------------------------------------------------------

    This proposed rule change is consistent with Regulation NMS because 
it applies only to odd-lot orders and unexecuted odd-lot remainders. 
Only round-lot orders are subject to the requirements of Regulation NMS 
in that only round-lot orders must be included in the Exchange's 
automated quote.\8\ In contrast, odd-lot orders are not displayed, and 
the prohibitions against both locked and crossed markets and trade-
throughs do not apply to odd-lots. Exchanges are permitted to establish 
their own rules for handling odd-lot orders and the odd-lot portions of 
mixed-lot orders.\9\
---------------------------------------------------------------------------

    \8\ Under Regulation NMS, Rule 600(b)(8) defines ``bid'' or 
``offer'' as the bid price or offer price for one or more round lots 
of an NMS security. This definition is embedded in the definition of 
``quotation'' in Rule 600(b)(62), as well as the definition of 
``protected bid'' or ``protected offer'' in Rule 600(b)(57). 17 CFR 
242.600(b).
    \9\ See Response No. 7.03 in ``Responses to Frequently Asked 
Questions Concerning Rule 611 and Rule 610 of Regulation NMS,'' 
Division of Trading and Markets, dated June 8, 2007.
---------------------------------------------------------------------------

    The Exchange also proposes to add a generic routing rule to clarify 
how any orders that are rejected from the Exchange's Matching System, 
and routed away according to Participant instructions, will be handled. 
The use of routing services is optional and is available only to 
exchange Participants.
    In such cases, the Participant will be responsible for ensuring 
that it has a relationship with its chosen destinations to permit the 
requested access. The Exchange shall not have responsibility for the 
handling of the order by the other destination, but will report any 
execution or cancellation of the order by the other destination to the 
Participant that submitted the order, will notify the other venue of 
any cancellations or changes to the order submitted by the order-
sending Participant and, if requested by the Participant and its chosen 
destination, will flip any executions into the Participants account, as 
necessary, and report that second leg of the away-market transaction to 
clearing.\10\
---------------------------------------------------------------------------

    \10\ For example, if the Exchange routes a participant's buy 
order to the participant's chosen destination (Router ABC) and 
Router ABC gets an execution of that order in another market against 
market maker XYZ, the first leg of the transaction (ABC buying from 
XYZ) will be reported to clearing by the other market. The Router 
ABC would send an execution report back to the Exchange (for routing 
to the original order-sending participant). Under this proposal, if 
the participant and Router ABC had requested, the Exchange would 
take the execution report and create a clearing-only record, 
flipping the execution from Router ABC's account to the account of 
the order-sending participant (ABC selling to the order-sending 
participant).

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

[[Page 28741]]

    The Exchange will provide its Routing Services pursuant to the 
proposed rule and three separate agreements, to the extent that they 
are applicable to a specific routing decision and deemed necessary by 
the Exchange and/or a third-party broker-dealer providing connectivity 
to other markets: (a) An agreement between the Exchange and each 
Participant on whose behalf orders will be routed (``Participant-
Exchange Agreement''); (b) an agreement between each Participant and a 
specified third-party broker-dealer that will use its routing 
connectivity to other markets and, if necessary, serve as a ``give-up'' 
in those markets (``Give-Up Agreement''); and (c) an agreement between 
the Exchange and the specified third-party broker-dealer (``Routing 
Connectivity Agreement'') pursuant to which the third-party broker-
dealer agrees to provide routing connectivity to other markets and 
serve as a ``give-up'' for the Exchange's Participants in other 
markets. The Routing Connectivity Agreement will include terms and 
conditions that enable the Exchange to comply with this rule.
    The Exchange will provide such Routing Services in compliance with 
its rules and with the provisions of the Act and the rules thereunder, 
including, but not limited to, the requirements of Sections 6(b)(4) 
\11\ and (5) \12\ of the Act that the rules of a national securities 
exchange provide for the equitable allocation of dues, fees and other 
charges among its members and issues and other persons using its 
facilities, and not be designed to permit unfair discrimination between 
customers, issuers, brokers or dealers.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b)(4).
    \12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act in general,\13\ and furthers the 
objectives of Section 6(b)(5) in particular,\14\ in that it is designed 
to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transaction in securities, to remove impediments and perfect the 
mechanisms of a free and open market, and, in general, to protect 
investors and the public interest. In this case, providing Participants 
the ability to have their undisplayed orders rejected from the 
Exchange's Matching System, to be cancelled or routed elsewhere for 
execution, protects investors and removes an impediment to a free and 
open market in that it improves the certainty of order execution.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78f(b).
    \14\ 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 that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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 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 proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CHX-2009-02 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CHX-2009-02. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 in the Commission's Public Reference Room, on official business 
days between the hours of 10 a.m. and 3 p.m. Copies of the filing also 
will be available for inspection and copying at the principal office of 
the Exchange. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-CHX-
2009-02 and should be submitted on or before July 8, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

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

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-14146 Filed 6-16-09; 8:45 am]
BILLING CODE 8010-01-P


