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Notice

Self-Regulatory Organizations; Notice of Filing of Proposed Change by the Chicago Stock Exchange, Incorporated and Amendment No. 1 Relating to Participation in Crossing Transactions Effected on the Exchange Floor

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Start Preamble January 24, 2001.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) [1] and rule 19b-4 therefunder,[2] notice is hereby given that on September 14, 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, II, and III below, which Items have been prepared by the CHX. The CHX amended the proposal on January 18, 2001.[3] The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons.

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 relating to 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 comments 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.Start Printed Page 8820

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 XX, rule 23 of the Exchange's rules relating to participation in crossing transactions in Nasdaq/National Market (“NM”) securities effected on the floor of the Exchange. This proposal is currently operating, on a pilot basis through February 28, 2001, for Dual Trading System issues traded on the Exchange.[4] This pilot was approved in connection with the securities industry's move to a decimal pricing environment. The proposed rule change would extend the pilot to cover crossing transactions in Nasdaq/NM securities.

Article XX, rule 23 of the Exchange's rules governs crossing transactions, which represent a significant component of Exchange volume.[5] under the current rule, if a floor broker presents a crossing transaction involving Nasdaq/NM issues, another member may participate, or “break up,” the transaction, by offering (after presentation of the proposed crossing transaction) to better 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(s).[6] 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 stock in Nasdaq/NM issues which trade in minimum price variations of 1/64.

Given the number of products that will begin trading in penny increments once the securities industry completes the transaction to a decimal pricing environment, 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 in the manner described above. Accordingly, the 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 pilot program, a floor broker will be permitted to consummate cross transactions in Nasdaq/NM issues, as well as Dual Trading System issues, involving 5,000 shares or more, 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 is intending 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 its quote, but will preclude them from breaking up a cross transaction after the cross transaction is presented. The proposed rule change will operate on a pilot basis through July 9, 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 change 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. 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 Exchange consents, the Commission will:

A. By order approve the proposed rule change, or

B. Institute proceedings to determine whether the proposed rule change should be disapproved.

The CHX has requested accelerated approval of the proposed rule change. While the Commission is not prepared to grant accelerated approval at this time, the Commission will consider granting accelerated approval of the proposal at the close of an abbreviated comment period of 15 days from the date of publication of the proposal in the Federal Register.

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. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 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-00-27 and should be submitted by February 20, 2001.

Start Signature
Start Printed Page 8821

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[9]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  See Letter dated January 16, 2001, from Kathleen M. Boege, Associate General Counsel, CHX, to Alton S. Harvey, Office Head, Division of Market Regulation, Commission (“Amendment No. 1”). Amendment No. 1 requests pilot approval of the proposed rule change through July 9, 2001.

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4.  Dual Trading System issues are issues that are listed on either the New York Stock Exchange or the American Stock Exchange. See Securities Exchange Act Release No. 43203 (August 24, 2000), 65 FR 53067 (August 31, 2000) (approving SR-CHX-00-13 on a pilot basis through February 28, 2001). The proposed rule change deletes the provisions of Article XX, Rule 23 that govern cross transactions in Nasdaq/NM issues and, thus, has the effect of also extending the pilot program in Dual Trading System issues until July 9, 2001.

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5.  For example, in June, July and August of 2000, share volume from brokered cross trades was approximately 21% of total share volume traded on the Exchange.

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6.  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 breakup 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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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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[FR Doc. 01-2818 Filed 2-1-01; 8:45 am]

BILLING CODE 8010-01-M