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Notice

Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change and Amendment Nos. 1 and 2 by The Chicago Stock Exchange, Incorporated Relating to Participation in Crossing Transactions Effected on the Exchange Floor

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Start Preamble August 24, 2000.

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 May 3, 2000, the Chicago Stock Exchange, Incorporated (“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 CHX. The CHX amended the proposal on August 22, 2000 and August 23, 2000, respectively.[3] The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons and to approve the proposed rule change, as amended, on an accelerated basis.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The Exchange proposes to amend Article XX, Rule 23 of the Exchange's rules governing participation in crossing transactions effected on the Exchange floor. The text of the proposed rule change is available at the Commission and the CHX.

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 Start Printed Page 53068comments it received regarding 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 Rule 23 governing participation in crossing transactions effected on the floor of the Exchange, which represent a significant component of Exchange volume.[4] Under current Rule 23, if a floor broker presents a crossing transaction, another member may participate, or “break up,” the transaction, by offering (after presentation of the proposed crossing transaction) to improve one side of the transaction by the minimum price variation. The floor broker is then effectively prevented from consummating the transaction as a “clean cross,” which may be to the detriment of the floor broker's customer.[5] In instances where the minimum price variation is relatively small, it is very inexpensive for a member to break up crossing transactions in this manner. Floor brokers are currently experiencing difficulty, for example, cleanly crossing transactions in stocks which trade in minimum price variations of 1/64th.

Given the number of products that are commencing trading in very small minimum price increments, as well as the certainty of small price increments once the securities industry makes the transition to decimal pricing, the floor broker community, and other CHX members, are concerned that much of the crossing business and corresponding Exchange volume could evaporate if the current rules are not amended to preclude breaking up crossing transactions. Accordingly, the Exchange's Decimalization Subcommittee and Floor Broker Tech Subcommittee have worked to achieve consensus on the proposed rule change, which would strike a balance of interests of those members who are impacted by crossing transactions.

Under the proposed rule change, a floor broker would be permitted to consummate crossing transactions involving 5,000 shares or more [6] without interference by any specialist or market maker if, prior to presenting the cross transaction, the floor broker first requests a quote for the subject security.[7] These requests will place the specialist and other market makers on notice that the floor broker intends to cross within the bid-offer spread. This arrangement will ensure that a specialist or market maker retains the opportunity to better the cross price by updating their quote, but will preclude them from breaking up a cross transaction after the cross transaction is presented. The proposed rule change will be implemented on a pilot basis through February 28, 2001.

2. Statutory Basis

The CHX believes that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder that are applicable to a national securities exchange. In particular, the CHX believes that the proposed rule is consistent with section 6(b)(5) [8] of the Act in that it is designed to promote just and equitable principles of trade, to remove impediments to 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.

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

The Exchange did not solicit or receive written comments on the proposed rule change.

III. Commission's Findings and Order Granting Accelerated Approval of the Proposed Rule Change

The Commission finds that the proposed rule change, as amended, is consistent with the Act and the rules and regulations under the Act applicable to a national securities exchange and, in particular, the requirements of section 6(b) of the Act.[9] Specifically, the Commission finds that the proposed rule change is consistent with the section 6(b)(5) [10] requirements that the rules of an exchange be designed to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts and, in general, to protect investors and the public interest.[11]

The Commission believes that the proposed rule change strikes a reasonable balance between the ability of floor brokers on the Exchange to execute crossing transactions and the ability of specialists and market makers to provide price improvement. In addition, the Commission believes that requiring floor brokers to request a quote in a particular security before presenting the transaction to be crossed will provide specialists and market makers both sufficient notice that the cross is about to occur between the bid and offer spread and an opportunity to improve their quote. The Commission notes that floor brokers would still retain the ability to present both sides of the order at the post if the customers so desire.

The Commission believes that it is consistent with the protection of investors and the public interest and therefore finds good cause for approving the proposed rule change prior to the thirtieth day after the date of publication of notice thereof in the Federal Register. The proposed rule change is designed to minimize possible negative effects on crossing transactions of decimal pricing, which is scheduled to begin in certain securities on August 28, 2000. In addition, the Commission notes that the proposed rule change is being approved on a pilot basis only, through February 28, 2001. In light of these factors, the Commission finds good cause to approve the proposed rule change on an accelerated basis.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, Start Printed Page 53069including 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. 20549-0609. Copies of the submissions, 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 filings will also be available for inspection and copying at the principal office of the Exchange. All submissions should refer to the File No. SR-CHX-00-13 and should be submitted by September 21, 2000.

V. Conclusion

It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (SR-CHX-00-13), as amended, is approved through February 28, 2001.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[12]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  See Letter dated August 21, 2000, from Paul B. O'Kelly, Executive Vice President, CHX, to Alton S. Harvey, Office Head, Division of Market Regulation (“Division”), Commission (“Amendment No. 1”). Amendment No. 1 requests accelerated approval of the proposed rule change on a pilot basis through February 28, 2001. Amendment No. 1 also extends the provisions of Rule 23 to Nasdaq National Market securities. See also Letter dated August 22, 2000, from Paul B. O'Kelly, Executive Vice President, CHX, to Alton S. Harvey, Office Head, Division, Commission (“Amendment No. 2”). Amendment No. 2 withdraws the portion of Amendment No. 1 that extends Rule 23 to Nasdaq National Market securities.

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4.  In February and March of 2000, for example, share volume from brokered crossing transactions constituted approximately 13% of total share volume traded on the Exchange.

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5.  Some institutional customers prefer executing large crossing transactions at a single price and are willing to forego the opportunity to achieve the piecemeal price improvement that might result from the break up of the cross transaction by another Exchange member. Of course, the floor broker will still retain the ability to present both sides of the order at the post if the customers so desire.

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6.  According to the Exchange, specialists and market makers rarely participate with respect to transactions involving less than 5,000 shares. Telephone conversation between Kathleen Boege, Associate General Counsel, CHX, and Sonia Patton, Attorney, Division, Commission (August 23, 2000).

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7.  These updated quotes will not be directed solely to the floor broker. Anyone at the post may respond to the updated quotes.

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11.  In approving this rule change, the Commission has considered its impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

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[FR Doc. 00-22274 Filed 8-30-00; 8:45 am]

BILLING CODE 8010-01-M