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Notice

Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 by the Chicago Stock Exchange, Inc., Relating to the Exchange's Limit Order Display Requirements

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Start Preamble December 4, 2001.

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 September 24, 1999, 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, II, and III below, which Items have been prepared by the Exchange. On November 20, 2001, the CHX amended the proposal.[3] The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons.

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

The Exchange proposes to amend its limit order display requirements under CHX Article XX, Rule 7 to conform to Rule 11Ac1-4 under the Act.[4] The text of the proposed rule change is below. Additions are in italics; deletions are in brackets.

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Chicago Stock Exchange Rules

Article XX, Rule 7. Recognized Quotations

Recognized quotations shall be public bids and offers in lots of one or more trading units or multiples thereof. Bids and offers in other market centers which may be displayed on the Floor for the purpose of ITS, or in accordance with Rule 39 or Rule 40 of this Article or other purposes shall have no standing in the trading crowds on the Floor. Bids or offers for less than one unit of trading shall specify the number of shares of stock or the principal amount of the bonds covered by the bid or offer. All bids made and all offers made shall be in accordance with the provisions of Rule 11Ac1-1 under the Securities Exchange Act of 1934, governing the dissemination of quotations for reported securities.

The following interpretations and policies pertain to all specialist system issues for which last sale information is reported pursuant to SEC Rule 11Aa3-1.

Interpretations and Policies:

.01 [Specialists shall input their current markets and sizes to the quotation system through the key terminal or the mark sense terminal at the post. These q]Q uotations shall be firm as to both price and size unless exempted under one of the conditions specified in paragraphs .06-.09 of this Rule.

.02 In respect to Dual Trading System issues specialists utilizing the Auto Quote mode are prohibited from disseminating a bid and/or offer more than 1/8 point away from the best ITS market.

.03 Market Makers, while at the post, shall input to the quotation system their bids and/or offers which better the current Exchange market. Such quotations shall remain in force until the market maker leaves the post. Market maker quotations and accompanying sizes shall be firm unless exempted under one of the conditions specified in paragraphs .06-.09 of this Rule.

.04 Floor Broker, while at the post, shall input to the quotation system those bids or offers which better the current Exchange market unless the bid or offer is cancelled or withdrawn if not executed immediately. If a floor broker transfers possession of an order to a specialist, the requirement for input to the quotation system becomes the obligation of the specialist. When a floor broker who retains possession of an order leaves the post he must withdraw his bid or offer from the quotation system. Quotations and accompanying sizes shall be firm until withdrawn unless exempted under one of the conditions specified in paragraphs .06-.09 of this Rule.

.05 (a) Quotation sizes, unless otherwise specified, shall be assumed to be for 100 shares. [Where bids or offers are made at the same price the aggregate quotation size of such equal bids or offers shall be inputted into the quotation system. Such aggregate sizes shall remain firm until withdrawn unless exempted under one of the conditions specified in paragraphs .06-.09 of this Rule.] With respect to agency limit orders received by specialists, each specialist shall publish immediately (i.e., as soon as practicable, which under normal market conditions means no later than 30 seconds from time of receipt) a bid or offer that reflects:

(i) The price and full size of each agency limit order that is at a price that would improve the specialist's bid or offer in such security; and

(ii) The full size of each agency limit order that is priced equal to the specialist's bid or offer and the national best bid or offer for such security and represents more than a de minimis change in relation to the size associated with the specialist's bid or offer;

(b) The requirements with respect to specialists' display of limit orders shall not apply to any limit order that is:

(i) Executed upon receipt of the order;

(ii) Placed by a person or entity who expressly requests, either at the time the order is placed or prior thereto pursuant to an individually negotiated agreement with respect to such person's orders, that the order not be displayed;

(iii) An odd-lot order;

(iv) Delivered immediately upon receipt to an exchange or association-sponsored system or an electronic communications network that complies with the requirements of Securities and Exchange Commission Rule 11Ac1-1(c)(5) under the Securities Exchange Act with respect to that order;

(v) Delivered immediately upon receipt to another exchange member or over-the-counter market maker that complies with the requirements of Securities and Exchange Commission Rule 11Ac1-4 under the Securities Exchange Act with respect to that order; [or]

(vi) An “all or none” order ; or[.]

(vii) A block size order, unless the customer order is received with a request that the order be displayed.

.06-.09 (no change)

* * * * *

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 Exchange 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 text of these statements may be examined at the places specified in Item IV below. The Exchange 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

On January 12, 1998, the Commission granted accelerated approval to a proposed rule change amending CHX Article XX, Rule 7 [5] that expressly provided for the display of customer limit orders as contained in Rule 11Ac1-4 under the Act.[6] However, that change did not make CHX, Article XX, Rule 7 totally consistent with Rule 11Ac1-4 in that the Exchange did not adopt certain exceptions allowed under Rule 11Ac1-4, nor did the Exchange limit the application of CHX Article XX, Rule 7 solely to customer limit orders.

The Exchange now proposes to amend CHX Article XX, Rule 7 to be more consistent with Rule 11Ac1-4. More specifically, the proposed rule change would exempt block size limit orders,[7] orders that represent only a de minimis change in relation to the size associated with a specialist's quote, and orders for the account of a broker or dealer from the requirements of CHX Article XX, Rule 7, Interpretation and Policy .05. THe proposed rule change would also eliminate the Exchange requirement that a CHX specialist immediately publish the full size of a customer limit order that is at a price that would not improve the specialist's bid or offer when such specialist's bid or offer is not equal to the national best bid or offer.

Under Rule 11Ac1-4(c)(5),[8] a specialist is not required to display an order that is delivered immediately Start Printed Page 64068upon receipt to an exchange or association-sponsored system that complies with the requirements of the rule with respect to that order. Because other market centers do not require the publication of certain orders that a CHX specialist must currently display under CHX Article XX, Rule 7 (e.g. block size orders), a CHX specialist may not deliver such orders to those other market centers for automatic relief from the requirements of CHX Article XX, Rule 7, despite the fact that such practice is permissible under Rule 11Ac1-4. The proposed modifications would, among other things, allow a CHX specialist to safely transfer such orders to other market centers that are subject to the requirements of Rule 11Ac1-4. As such, the proposed rule change would make CHX Article XX, Rule 7 more consistent with the requirements of Rule 11Ac1-4.

The proposal would also eliminate in CHX Article XX, Rule 7, Interpretation and Policy .01, a reference to the mark sense terminal, an Exchange facility that is no longer operational.

2. Statutory Basis

The Exchange believes that the proposed rule change is consistent with Section 6(b)(5) of the Act [9] in that it is designed to promote just and equitable principles of trade, to remove impediments to and 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 burden on competition.

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 CHX 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. 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 in the Commission's Public Reference Room. Copies of such filing will also be available for inspection and copying at the principal office of the CHX. All submissions should refer to File No. SR-CHX-99-18 and should be submitted by January 2, 2002.

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For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[10]

Jonathan G. Katz,

Secretary.

End Signature End Preamble

Footnotes

3.  See October 15, 2001 letter from Daniel J. Liberti, Vice President and Chief Enforcement Counsel, CHX, to Joseph Morra, Special Counsel, Division of Market Regulation, Commission (“Amendment No. 1”). The CHX mailed Amendment No. 1 to the Commission on October 15, 2001, but the Commission never received the Amendment. The CHX provided the Commission with a telefaxed copy of the Amendment on November 20, 2001. The Commission agreed to accept the Amendment as of November 20, 2001, while awaiting delivery of the original, signed Amendment. In Amendment No. 1, the CHX (i) confirmed that the proposed change to exempt block-sized orders from the CHX's limit order display requirement will not apply when a customer has requested that the order be displayed; (ii) corrects a typographical error relating to CHX Article XX, Interpretation and Policy .01 relating the mark sense terminal; and (iii) adds new identifiers for subparagraphs (a) and (b) in CHX Article XX, Interpretation and Policy .05. The CHX made other minor, non-substantive changes to the proposal. See December 3, 2001 telephone conversation between Daniel J. Liberti, Vice President and Chief Enforcement Counsel, CHX, and Joseph Morra, Special Counsel, Division of Market Regulation, Commission.

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5.  See Securities Exchange Act Release No. 39540 (January 12, 1998), 63 FR 2708 (January 16, 1998) (SR-CHX-97-26).

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7.  As defined in Rule 11Ac1-4, a block size order is an order of at least 10,000 shares or for a quantity of stock having a market value of at least $200,000.

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[FR Doc. 01-30503 Filed 12-10-01; 8:45 am]

BILLING CODE 8010-01-M