
[Federal Register Volume 79, Number 4 (Tuesday, January 7, 2014)]
[Notices]
[Pages 883-885]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-31607]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71216; File No. SR-CHX-2013-23]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Provide That the Match Trade Prevention Modifier Is Not Compatible 
With the Fill Or Kill Modifier

December 31, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on December 23, 2013, 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 and 
II below, which Items have been prepared by the self-regulatory 
organization. CHX has filed this proposal pursuant to Exchange Act Rule 
19b-4(f)(6) \3\ which is effective upon filing with the Commission. 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.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CHX proposes to amend Article 1, Rule 2(b)(3)(F) to provide that 
the Match Trade Prevention order execution modifier is not compatible 
with the Fill Or Kill order duration modifier. The text of this 
proposed rule change is available on the Exchange's Web site at 
(www.chx.com), on the Commission's Web site at (www.sec.gov), 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 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 Article 1, Rule 2(b)(3)(F) to 
provide that the Match Trade Prevention (``MTP'') order execution 
modifier is not compatible with the Fill Or Kill (``FOK'') order 
duration modifier and that any limit or market order marked MTP and FOK 
shall be rejected by the Matching System.\4\ Given that MTP has been 
incompatible with FOK since MTP became operative on December 2, 2013, 
the Exchange also submits this filing to correct certain statements in 
the Form 19b-4 filed by the Exchange under SR-CHX-2013-20, which 
inaccurately states that the MTP modifier is fully compatible with all 
order modifiers applicable to limit and market orders.\5\ More 
accurately, the MTP modifier is fully compatible with all order 
modifiers applicable to limit and market orders, except for the FOK 
modifier, as discussed in detail below. The Exchange does not propose 
to substantively amend the functionality of the MTP modifier.\6\
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    \4\ Article 1, Rule 2(d)(2) defines ``Fill Or Kill'' or ``FOK'' 
as ``a modifier that requires an order to be executed in full and 
for limit orders, at or better than its limit price, as soon as the 
order is received by the Matching System, but that will be 
immediately cancelled if it cannot be executed in full. An order 
marked FOK may be executed at one or more different prices against 
orders in the Matching System (including any Reserve Size or 
undisplayed orders).
    An order marked FOK shall be deemed to have been received `Do 
Not Route,' as defined under paragraph (b)(3)(A), which cannot be 
overridden by an order sender.''
    \5\ See Securities Exchange Act Release No. 70948 (November 26, 
2013), 78 FR 72731 (December 3, 2013) (SR-CHX-2013-20) (``Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change to 
Adopt a Match Trade Prevention Modifier for Limit and Market Order 
Submitted to the Exchange'').
    \6\ The Exchange notes that it deactivated the FOK modifier as 
of December 4, 2013, pursuant to its authority under Article 20, 
Rule 4(b), and that the Exchange has never received any orders 
marked MTP and FOK.
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Background
    On November 20, 2013, the Exchange filed SR-CHX-2013-20 for 
immediate effectiveness, which adopted the current MTP order modifier, 
as defined under Article 1, Rule 2(b)(3)(F), and became operative on 
December 2, 2013.\7\
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    \7\ See supra note 5.
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    In sum, the MTP functionality is based on the interaction between 
MTP Trading Groups \8\ and, if applicable, subgroups within the MTP 
Trading Group, which are created through the use of optional MTP 
sublevel designations. Assuming that the MTP functionality has been 
activated by the Trading Permit Holders that are part of the MTP 
Trading Group, an incoming limit or market order marked with an MTP 
modifier, which is comprised of a compulsory MTP Action and an optional 
MTP sublevel designation, will not be allowed to execute against a 
resting opposite side order from the same MTP Trading Group. However, 
if the MTP modifier of the incoming limit or market order indicates an 
MTP sublevel designation, the order will be considered to have 
originated from a subgroup within the MTP Trading Group, designated by 
the sublevel value, and will only be prevented from executing against 
resting opposite side orders from the same subgroup (i.e., same 
optional MTP sublevel designation). Consequently, an incoming order 
that originated from a subgroup will not be prevented from executing 
against opposite side resting orders from the same MTP Trading Group, 
so long as the opposite side order is not part of the same subgroup 
(i.e., the resting order is either marked by a different MTP sublevel 
designation or is not marked by any MTP sublevel designation).
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    \8\ Article 1, Rule 1(mm) defines ``MTP Trading Group'' as ``a 
group of one or more Trading Accounts that have been aggregated at 
the request of all Participant Trading Permit holders that control 
all Trading Accounts within the proposed group for the purpose of 
enabling Match Trade Prevention (`MTP') functionality, pursuant to 
Article 1, Rule 2(b)(3)(F)(i). A Trading Account may not be assigned 
to more than one MTP Trading Group. Any Exchange-approved changes to 
the composition of an MTP Trading Group shall be effective no 
earlier than the trading day following the request.''
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    Once MTP is triggered, one or both orders will be cancelled 
pursuant to the MTP Action of the MTP modifier attached to the incoming 
order. If the incoming order has an MTP Action of ``N,'' the incoming 
order would be cancelled. If the incoming order has an MTP Action of 
``O,'' the resting order would be cancelled. If the incoming order has 
an MTP Action of ``B,'' both the incoming and resting orders would be 
cancelled. Moreover, if the incoming order is marked ``I,'' MTP would 
be deactivated and would not prevent a match.
MTP and FOK
    On p. 16 and p. 41 of SR-CHX-2013-20,\9\ the Exchange stated that 
the ``proposed MTP modifier is fully compatible with all order 
execution, display, and duration modifiers, that are applicable to 
limit and market

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orders.'' \10\ While MTP and FOK are compatible in theory,\11\ MTP and 
FOK are incompatible in practice because the Matching System currently 
handles an incoming order marked FOK in a manner that may result in the 
FOK modifier being ignored if (1) the incoming order must execute 
against two or more resting orders and (2) MTP is triggered by the 
second or subsequent resting orders.
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    \9\ See supra note 5.
    \10\ Id.
    \11\ In contrast, Post Only and FOK are theoretically and 
practically incompatible. See Article 1, Rule 2(b)(1)(D). A limit 
order marked Post Only requires the order to be posted to the CHX 
Book or cancelled if the order would remove liquidity from the CHX 
Book. In contrast, a limit order marked FOK cannot post to the CHX 
Book and must remove liquidity from the CHX Book and be executed in 
full or be cancelled in its entirety.
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    Generally, when the Matching System receives an incoming limit 
order marked FOK, the Matching System will take the preliminary step of 
determining whether there is sufficient resting order size to 
immediately execute the incoming FOK order in full. In doing so, the 
Matching System only considers the total size of the resting orders 
necessary to immediately execute the incoming FOK order in full and 
does not pre-match the incoming FOK order against each of these resting 
orders. If there is not enough resting size, the Matching System will 
cancel the incoming FOK order. If there is enough resting size, the 
Matching System will next attempt to match the incoming FOK order 
against each of the resting orders necessary to execute the incoming 
FOK order in full and will execute such orders in price/time priority 
of the resting orders.\12\ In considering each set of contra-side 
orders, the Matching System will consider all order modifiers attached 
to the contra-side orders, but will consider the MTP modifier(s) last.
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    \12\ See Article 20, Rule 8(b).
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    Prior to adopting the MTP modifier, this process of handling 
incoming FOK orders was sufficient because there were no other order 
modifiers that could prevent a full and immediate execution of the 
incoming FOK order after the preliminary resting size test of the FOK 
modifier was satisfied. Thus, it was impossible for an incoming FOK 
order to be partially-executed. However, an incoming FOK order marked 
MTP could now result in a partial execution of an incoming FOK order. 
Specifically, if MTP is triggered by the second or subsequent resting 
order, there may not be enough resting size remaining to fully satisfy 
the incoming FOK order. Thus, an incoming FOK order could be cancelled 
with a partial execution, which would violate the FOK modifier. The 
following Examples 1 and 2 illustrate this scenario.
    Example 1. Assume that the Matching System receives an incoming 
limit buy order (``Bid A'') for 1,000 shares of security XYZ priced at 
$10.10/share is marked FOK and MTP, with an MTP Action of ``N'' and no 
MTP sublevel designation, and originated from MTP Trading Group A1. 
Assume that the CHX Book for security XYZ contains no resting bids, but 
has two resting offers (``Offers A and B''). Assume that Offer A is a 
limit order for 500 shares of XYZ priced at $10.10/share marked MTP 
that originated from MTP Trading Group B1. Assume that Offer B is also 
a limit order for 500 shares of XYZ priced at $10.10/share marked MTP 
that originated from MTP Trading Group B1. Assume further that Offer A 
has time priority over Offer B and that Offers A and B are at the 
National Best Offer.
    Under this Example 1, since Bid A is marked FOK, the Matching 
System will take the preliminary step of determining whether Bid A 
could be immediately executed in full. Given that Bid A is for 1,000 
shares of XYZ priced at $10.10/share and Offers A and B are for a 
combined 1000 shares of XYZ priced at $10.10/share, the Matching System 
will determine that there is enough resting order size on the CHX Book 
to immediately execute Bid A in full. The Matching System will then 
attempt to match Bid A against Offer A. Since the non-MTP order 
modifiers attached to Bid A and Offer A do not conflict, the Matching 
System will next consider the MTP Trading Groups of the order because 
the incoming order is marked MTP with an MTP Action of ``N.'' Since Bid 
A is from Trading Group A1 and Offer A is from Trading Group B1, MTP 
will not be triggered and the MTP Action of ``N'' will not come into 
play. As such, the Matching System will permit Bid A to execute against 
Offer A, which will result in Bid A being decremented by 500 shares. 
The Matching System will then go through the same process with the 500 
remaining shares of Bid A and Offer B. Given that Offer B is identical 
to Offer A, the Matching System will go through the same process and 
permit the remaining 500 shares of Bid A to execute against Offer B. 
The result is that Bid A has been immediately executed in full, which 
is consistent with the FOK modifier.
    Example 2. Assume the same as Example 1, except that Offer B 
originated from MTP Trading Group A1, which is the same MTP Trading 
Group as Bid A.
    Under this Example 2, MTP would prevent the remaining 500 shares of 
Bid A from executing against Offer B because both orders originated 
from MTP Trading Group A1. Pursuant to the MTP Action of ``N,'' Bid A 
would be cancelled as it is the incoming order, while Offer B would 
remain posted to the CHX Book. As a result, Bid A would be cancelled 
with a partial execution (i.e., 500 shares of Bid A executed against 
the full size of Offer A), which is in violation of the FOK modifier. 
The result would be the same if Bid A were marked ``O,'' as the ``O'' 
MTP Action would require Offer B to be cancelled and since there are no 
remaining resting orders against which Bid A could execute, Bid A would 
be cancelled with a partial execution. Similarly, if Bid A had an MTP 
Action of ``B,'' both Bid A and Offer B would be cancelled, which would 
also result in Bid A being cancelled with a partial execution.
    The Exchange notes that this issue could be resolved by having the 
Matching System pre-match an incoming FOK order against the required 
resting orders prior to executing any one trade. If the pre-match 
revealed that one or more of the resting orders could not execute 
against the incoming order due to MTP and that the result would be 
insufficient remaining resting size to fully and immediately execute 
the incoming FOK order, the pre-match would fail and the incoming FOK 
order would be cancelled without any partial executions. However, given 
the tremendous amount of resources needed to modify the Matching System 
to make this change and in light of the fact that the Exchange 
infrequently receives FOK orders, the Exchange proposes to reject all 
incoming orders marked MTP and FOK when the FOK modifier is 
reactivated.\13\
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    \13\ See supra note 6. If the Exchange decides to modify the 
operation of the Matching System to permit an order to be marked FOK 
and MTP, the Exchange will file a proposed rule change pursuant to 
Rule 19b-4 under the Act to effectuate such a change.
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2. Statutory Basis
    The Exchange submits that the proposed rule filing is consistent 
with Section 6(b) of the Act in general \14\ and furthers the 
objectives of Section 6(b)(5) in particular,\15\ because it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transaction in 
securities, to remove impediments to, and perfect the mechanisms of, a 
free and open market and, in general, by protecting investors

[[Page 885]]

and the public interest. Specifically, the proposed rule filing 
amending Article 1, Rule 2(b)(3)(F) to provide that the MTP modifier is 
not compatible with the FOK modifier and that orders marked MTP and FOK 
shall be rejected by the Matching System provides accuracy concerning a 
functionality already offered by the Exchange, which, in turn, promotes 
all of the objectives of Section 6(b)(5).
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    \14\ 15 U.S.C. 78f(b).
    \15\ 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 filing will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act because this filing clarifies 
the operation of the current MTP modifier and does not propose to 
modify its functionality.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \16\ and Rule 19b-4(f)(6) thereunder.\17\ 
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 and Rule 19b-
4(f)(6)(iii) thereunder.
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    \16\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \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 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\19\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative upon filing. The Exchange requested such waiver so 
that it may immediately provide accuracy as to the current 
functionality of the MTP modifier and address inaccurate statements in 
SR-CHX-2013-20. Based on the Exchange's statements, the Commission 
believes that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest. Therefore, the 
Commission designates the proposed rule change to be operative upon 
filing.\20\
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    \18\ Id.
    \19\ 17 CFR 240.19b-4(f)(6)(iii).
    \20\ For 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: (i) 
necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings under Section 19(b)(2)(B) \21\ 
of the Act to determine whether the proposed rule should be approved or 
disapproved.
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    \21\ 15 U.S.C. 78s(b)(2)(B).
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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 email to rule-comments@sec.gov. Please include 
File Number SR-CHX-2013-23 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-2013-23. This file 
number should be included on the subject line if email 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, 100 F Street NE., 
Washington DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal offices 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-2013-23, 
and should be submitted on or before January 28, 2014.

    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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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-31607 Filed 1-6-14; 8:45 am]
BILLING CODE 8011-01-P [FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
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