
[Federal Register Volume 76, Number 81 (Wednesday, April 27, 2011)]
[Notices]
[Pages 23634-23636]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-10099]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64319; File No. SR-CHX-2011-04]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Add the CHX Only Order Type

April 21, 2011.
    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 April 19, 2011, 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 and 
II 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. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CHX proposes to amend CHX Article 1, Rule 2 (Order Types and 
Conditions) and Article 20, Rules 4 (Eligible Orders) and 8 (Operation 
of the Matching System) to add the CHX Only order type. The text of 
this proposed rule change is available on the Exchange's Web site at 
(http://www.chx.com) and in the Commission's Public Reference Room.

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 changes [sic] 
and discussed any comments it received regarding the proposal. 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 1, Rule 2 (Order Types 
and Conditions) and Article 20, Rules 4 (Eligible Orders) and 8 
(Operation of the Matching System) to add the CHX Only order type. CHX 
Only orders are designed to encourage displayed liquidity on the 
Exchange and reduce automatic cancellations by the Exchange's core 
trading facility, the Matching System, for orders which lock or cross 
the best displayed quotes in the National Market System. CHX Only 
orders will be automatically repriced by the Exchange, if necessary as 
discussed below, to reside in the Matching System and be displayed to 
the national market system at prices which are in conformity with 
Regulation NMS and the short sale price test restrictions of Rule 201 
of Regulation SHO. An order sender can enter instructions to have all 
limit orders default to ``CHX Only'' and therefore be subject to the 
repricing process. In addition, an order sender can enter instructions 
to only use the repricing process if the CHX Only order locks the NBBO 
at the time of order entry, and not if it crosses the NBBO. Such 
instructions can be submitted on either an order-by-order or global 
basis by the order sending firm. If such instructions are given and the 
order crosses the NBBO, it will be rejected from the Matching System.
    As a general matter, CHX Only orders are limit orders which are 
ranked and executed on the Exchange according to the provisions of Rule 
8 of Article 20. By their nature, CHX Only orders are not eligible for 
routing away by the Exchange to another trading center.\3\
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    \3\ The CHX Only order type is therefore similar to the ``Do Not 
Route'' order defined in Article 20, Rule 4.b(10), which also cannot 
be routed to another destination. The repricing process defined in 
this filing does not apply, however, to Do Not Route orders.
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    In addition to the foregoing, a CHX Only order which, at the time 
of entry to the Matching System, would cross a Protected Quotation, as 
defined in Regulation NMS Rule 600(b)(58), will be automatically 
repriced by the Exchange to the locking price and ranked at such price 
in the Matching System. A CHX Only order that, if at the time of entry, 
would create a violation of Rule 610(d) of Regulation NMS by locking or 
crossing a Protected Quotation will be displayed by the Matching System 
at one minimum price variation below the current NBO (for bids) or to 
one minimum price variation above the current NBB (for offers) (the 
``NMS repricing process'').\4\ In the event that

[[Page 23635]]

the NBBO changes such that the CHX Only order at the original locking 
price would not lock or cross a Protected Quotation, the order subject 
to NMS repricing will receive a new timestamp, and will be displayed at 
the original locking price.\5\
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    \4\ Such orders will be ranked at the locking price at the time 
they are received by the Matching System. As noted above, an order 
sender is permitted to submit an instruction that only orders which 
lock the NBBO at the time of order entry be subject to the repricing 
process. Orders which cross the NBBO would be rejected back to the 
order sender.
    \5\ Any ranking, display or acceptance will be in compliance 
with applicable rules regarding minimum pricing increments. See, 
Regulation NMS Rule 612.
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    In order to promote compliance with recent amendments to Regulation 
SHO,\6\ CHX Only sell short orders will only execute at one minimum 
increment above the current NBB if the short sale price test 
restrictions of Rule 201 of Regulation SHO are in effect for the 
covered security, and no exemption to such restrictions is applicable. 
A CHX Only order that, at the time of entry, could not be executed or 
displayed based on Rule 201 of Regulation SHO will be repriced by the 
Matching System at one minimum price variation above the current NBB 
(``short sale repricing'' and together with NMS repricing, the 
``repricing process'') if the short sale price test restriction under 
Rule 201 of Regulation SHO is in effect for the covered security.\7\ A 
CHX Only order subject to short sale repricing will not be readjusted 
downward even if it could be displayed at a lower price without 
violation of Rule 201 of Regulation SHO. Neither CHX Only orders marked 
``short exempt'' nor CHX Only orders displayed by the Matching System 
at a price above the then current NBB at the time of initial display 
shall be subject to short sale repricing. If a CHX Only order is 
eligible for the repricing process, it will be subject to both NMS 
repricing and short sale repricing.
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    \6\ See Exchange Act Release No. 61595 (Feb. 26, 2010), 75 FR 
11232 (Mar. 10, 2010) (adopting amendments to Rule 201 and Rule 
200(g) of Regulation SHO). Among other things, Rule 201 requires a 
trading center to establish, maintain, and enforce written policies 
and procedures reasonably designed to prevent the execution or 
display of a short sale order of a covered security at a price that 
is less than or equal to the current national best bid if the price 
of that covered security decreases by 10% or more from its previous 
day's closing price. The amendment to Rule 200(g) provides a ``short 
exempt'' marking requirement. The compliance date for the amendments 
to Regulation SHO was February 28, 2011. See, Exchange Act Release 
No. 63247 (Nov. 4, 2010), 75 FR 68702 (Nov. 9, 2010). See also, 
Division of Trading & Markets, Responses to Frequently Asked 
Questions Concerning Rule 201 of Regulation SHO.
    \7\ See 17 CFR 242.201(a)(1). Under Rule 201, the term ``covered 
security'' means any ``NMS stock,'' as defined in Rule 600(b)(47) of 
Regulation NMS. See, 17 CFR 242.600(b)(47).
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    An example illustrates how the CHX Only order type would function. 
Suppose that the prevailing market for security XYZ (which is a 
security subject to the provisions of Regulation NMS and Regulation 
SHO) is $30.25 (bid)--$30.26 (offered) and the best priced bid in the 
Matching System is priced at $30.23. A CHX Only order to sell 100 
shares of XYZ at $30.24 is submitted to the Matching System.\8\ Since 
the order is not immediately executable within our system and the 
display of the sell order at $30.24 would result in an impermissible 
crossed market, the inbound sell would normally be cancelled and 
rejected back to the order sender or routed to another destination 
according to each Participant's instructions pursuant to the provisions 
of Article 20, Rule 8(h). Pursuant to the NMS repricing process, a CHX 
Only sell order would be repriced at the locking price (i.e., $30.25 in 
this instance) for purposes of ranking within the CHX book. The 
Matching System would publicly display the sell order at $30.26 in 
order to avoid locking the market in violation of Rule 6 of Article 20 
(Locked and Crossed Markets). If a buy order was submitted which could 
be executed against the resting CHX Only order (i.e., the buy order was 
priced at $30.25 or above), it would execute at the price at which the 
CHX Only sell order was ranked within the Matching System, or $30.25 in 
this example.
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    \8\ This example assumes the order to sell is either long or 
short, when the short sale price test restriction is not in effect.
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    If the CHX Only order was a non-exempt sell short order and the 
short sale price test restrictions of Rule 201 of Regulation SHO were 
in effect for that security, then the order would have been ranked and 
displayed at one minimum increment above the current NBB at the time of 
receipt, in this case $30.26. Thus, the subsequent submission of a buy 
limit order priced at $30.25 would not result in a match, and the buy 
order would normally be displayed in the Matching System at $30.25. 
Only a buy order priced at $30.26 or above would result in a 
transaction by matching against the displayed CHX Only sell short 
order.
    By submitting CHX Only orders, Participants will be able to avoid 
the risk that their orders will be routed away or rejected because of 
changes in the state of the national market system during the process 
of order transmission. In addition, the use of the CHX Only order type 
in connection with a sell short order will promote compliance with Rule 
201 of Regulation SHO since non-exempt CHX Only sell short orders 
priced at or below the current NBB would be repriced to one increment 
above the current NBB.\9\ Moreover, the execution of CHX Only orders in 
certain circumstances (such as the example noted above) will result in 
price improvement above the displayed bid or offer for inbound orders. 
CHX notes that order types similar to the CHX Only order are already in 
use by other market centers.\10\
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    \9\ Non-CHX Only sell short orders submitted with a limit price 
at or below the current NBB at the time received by the Matching 
System and which are not marked as sell short exempt shall be 
cancelled and rejected back to the order sender.
    \10\ See, e.g., BATS Rule 11.9(c)(4) (BATS Only order) and EDGX 
Rule 11.5(c)(4) (EDGX Only order). See also, Exchange Act Release 
No. 63948 (Feb. 23, 2011), 76 FR 11303 (Mar. 1, 2011) (adopting the 
short sale price sliding process for BATS Only orders). See also, 
BATS Rule 11.9(c)(4), (g); EDGX Rule 11.5(c)(4)(B).
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    The Exchange is also amending Rule 8 of Article 20 to describe how 
the Matching System will process sell short orders in light of the 
recent adoption of the short sale price test restrictions of Regulation 
SHO. For any execution or display of a short sale order in a covered 
security to occur on the Exchange when a short sale price test 
restriction is in effect, the price must be above the current NBB, 
unless the sell order was initially displayed by the Matching System at 
a price above the then-current NBB or is marked ``short exempt'' 
pursuant to Regulation SHO.\11\ A short sale order, other than a CHX 
Only order (which will be repriced), will be cancelled back to the 
order sender if, based on Rule 201 of Regulation SHO, such order is not 
executable, cannot be routed to another trading center pursuant to 
Article 20, Rule 8(h) below and cannot be posted to the Matching 
System. These provisions apply to all orders submitted to the Matching 
System.
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    \11\ Do Not Display sell short orders will not be accepted by 
the Matching System if at the time of receipt the limit price is at 
or below the current NBB, and no exception applies.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act in general,\12\ and furthers the 
objectives of Section 6(b)(5) in particular,\13\ 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 by allowing CHX to amend its rules to 
add the CHX Only

[[Page 23636]]

order types based on similar rules already in effect at other 
exchanges.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    As noted above, CHX Only orders are designed to encourage displayed 
liquidity on the Exchange and reduce automatic cancellations by the 
Exchange's core trading facility, the Matching System, for orders which 
lock or cross the best displayed quotes in the National Market System. 
CHX Only orders will be automatically repriced by the Exchange's 
systems on behalf of order senders. Participants will not have to 
reenter orders which otherwise would have been cancelled and rejected 
by the Exchange's systems to avoid prohibited locked or crossed markets 
and trade throughs, therefore reducing messaging traffic and 
facilitating the speedy representation of such orders in the national 
market system. The use of the CHX Only order will also facilitate 
compliance with the short sale price test restrictions of Regulation 
SHO. Again, Participants will not have to reenter sell short orders 
which would have been rejected by the Matching System if they were at 
or below the current NBB at the time when they were received, and no 
exception to the short sale price test restrictions applied. The 
Exchange notes that other market centers, such as the BATS exchanges 
and Direct Edge exchanges, have order types which make use of the 
repricing process. The addition of these order types is intended to 
benefit Exchange customers by reducing message traffic and improving 
fill rates and promote competition among market centers offering 
similar products and services.

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 Regarding 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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \14\ and Rule 19b-4(f)(6) thereunder.\15\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \16\ and Rule 19b-
4(f)(6) thereunder.\17\
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    \14\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \18\ normally 
may not become operative prior to 30 days after the date of filing.\19\ 
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has requested that the 
Commission waive the 30-day operative delay. The Commission believes 
that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest. Other national 
securities exchanges have adopted similar order types,\20\ and this 
proposal does not raise any novel issues. For these reasons, the 
Commission designates the proposed rule change to be operative upon 
filing with the Commission.\21\
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    \18\ Id.
    \19\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires that a self-regulatory organization submit to 
the Commission written notice of its intent to file the proposed 
rule change, along with a brief description and text of the proposed 
rule change, at least five business days prior to the date of filing 
of the proposed rule change, or such shorter time as designated by 
the Commission. The Exchange has satisfied this requirement.
    \20\ See BATS Rule 11.9(c)(4) (BATS Only order), (g) (price 
sliding); EDGX Rule 11.5(c)(4) (EDGX Only order).
    \21\ For the purposes only of waiving the 30-day operative 
delay, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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-2011-04 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-2011-04. 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 Web site viewing and 
printing 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-2011-04 and should be submitted on or before May 18, 
2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-10099 Filed 4-26-11; 8:45 am]
BILLING CODE 8011-01-P


