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Notice

Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the Chicago Stock Exchange, Incorporated Relating to Execution of Limit Orders Following Primary Market Block-Size Trade-Through

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Start Preamble December 20, 2002

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”),[1] and Rule 19b-4 thereunder,[2] notice is hereby given that on December 11, 2002, the Chicago Stock Exchange, Incorporated (“CHX” or “Exchange”) filed with the Securities and Exchange Commission (the “Commission”) the proposed rule change as described in Items I, II and III below, which Items have been prepared by the Exchange. The Exchange filed the proposal pursuant to Section 19(b)(3)(A) of the Act,[3] and Rule 19b-4(f)(6) [4] thereunder, Start Printed Page 79672which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

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

The Exchange proposes to amend certain provisions of CHX Article XX, Rule 37(a)(3), which governs, among other things, execution of limit orders in a CHX specialist's book following a trade-through in the primary market. Specifically, the CHX seeks to add a provision that would permit, but not require, a CHX specialist to enable a functionality that would automatically execute designated limit orders represented in the specialist's quotation, following a “block size” [5] trade-through in the primary market, at the block price instead of the limit price. The text of the proposed rule change is available at the Commission and at 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 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 proposed rule change would permit a CHX specialist to enable a functionality that would automatically execute designated limit orders represented in the specialist's quotation, following a “block size” trade-through in the primary market, at the block price instead of the limit price.

Under existing Exchange rules relating to listed securities, whenever a block trade in the primary market trades through a specialist's quote, the specialist must execute all limit orders in the book (that are priced at the block price or better) at the better block price, rather than at their less-favorable limit prices.[6] This requirement protects resting customer limit orders against large trade-throughs in the primary market.

At the time a trade-through occurs, however, it is impossible to determine whether it qualifies as a “block trade.”[7] For that reason, the Exchange's systems have been designed to automatically execute resting customer limit orders at their limit prices; CHX specialists must later correct those prices to the better block price, if they have determined that a block trade occurred.

This practice of correcting execution prices, even when it results in a better execution for the customer, is a large inconvenience to some key CHX order-sending firms. These electronically sophisticated firms must send out two trade confirmations to each customer—one that is generated as soon as the trade occurs and a second to reflect the corrected execution price.

To accommodate CHX order-sending firms, the proposed rule change would permit, but not require, a CHX specialist to enable a functionality that would automatically execute designated limit orders when a block-size trade-through occurs in the primary market at the block price. We anticipate that the use of this functionality will result in a dramatic reduction of price corrections and, thus, will provide better customer service to some of the Exchange's key order-sending firms.

In addition to adding the optional functionality detailed above, the proposed rule change would relocate the existing provision currently located in Article XX, Rule 7.06 to Article XX, Rule 37(a)(3) of the CHX Rules, which governs execution of limit orders in a CHX specialist's book when certain conditions occur in the primary market. It is important to note that the proposed rule change does not seek to modify a CHX specialist's execution obligations whatsoever. Rather, it represents the Exchange's attempt to address the concerns of its order-sending firms by providing CHX specialists with a functionality that they can utilize to meet their obligations automatically, instead of by means of the manual price correction procedure currently used. Moreover, the proposed functionality would only permit a CHX specialist to designate an order for automatic execution based on objective criteria such as the size of the order. For this reason, as set forth below, the Exchange believes that immediate effectiveness of the rule change is amply warranted.

The Exchange intends to allow its specialists to begin using this new functionality floor-wide on January 2, 2003; a pilot version of the functionality likely will be tested in a limited number of issues beginning the week of December 16, 2002.

2. Statutory Basis

The CHX believes the proposal is consistent with the requirements of the Act and the rules and regulations thereunder that are applicable to a national securities exchange, and, in particular, with the requirements of Section 6(b).[8] The CHX believes the proposal 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, 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 of 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 Regarding the Proposed Rule Change Received From Members, Participants or Others

Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act [10] and Rule 19b-4(f)(6)[11] thereunder because the proposal: (1) Does not significantly affect the protection of investors or the public interest; (2) does not impose any significant burden on competition; and (3) does not become operative for 30 days from the date of filing, or such shorter time as the Commission may Start Printed Page 79673designate if consistent with the protection of investors and the public interest; provided that the Exchange has given the Commission written notice of its intent to file the proposed rule change at least five business days prior to the filing date of the proposed rule change. At any time within 60 days of the filing of such proposed rule change, the Commission may summarily abrogate 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.

The Exchange has requested that the Commission accelerate the operative date. The Commission believes waiving the 30-day operative delay is consistent with the protection of investors and the public interest.[12] The Commission believes that acceleration of the operative date will allow the Exchange to implement this new automatic functionality floor-wide on January 2, 2002 and to permit a pilot version of the functionality to be tested beginning the week of December 16, 2002. For these reasons, the Commission designates this proposal as both effective and operative upon filing with the Commission.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposal 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-2002-37 and should be submitted by January 21, 2003.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[13]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

5.  A “block size trade” means a trade that involves 10,000 or more shares of a Dual Trading System (i.e., listed) issue, or having a market value of $200,000 or more.

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6.  See CHX Article XX, Rule 7.06.

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7.  A block trade is a trade that involves (a) a trade of “block size” (10,000 shares or more, or with a market value of $200,000 or more); and (b) either (i) a cross of block size (where a single firm represents all of one side of the transaction and all or a portion of the other side) or (ii) any other transaction where a single firm represents an order of block size on only one side of the transaction, so long as the transaction does not occur at the Exchange's current bid or offer. At the time a transaction occurs on another market, the CHX can determine whether it is a block size trade; the CHX does not yet know, however, which firms were on which sides of the transaction and therefore cannot determine whether it meets the other requirements of a block trade.

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12.  For purposes only of accelerating the operative date of this proposal, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

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[FR Doc. 02-32916 Filed 12-27-02; 8:45 am]

BILLING CODE 8010-01-P