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Federal Register / Vol. 67, No.

217 / Friday, November 8, 2002 / Notices 68219

SECURITIES AND EXCHANGE Section 8(d)(i) of the ITS Plan execute a transaction at a price inferior
COMMISSION provides that absent reasonable to the price quoted by another ITS
justification or excuse, a member of a Participant must generally either (i)
[Release No. 34–46760; File No. SR–CHX–
Participant Exchange should not effect attempt to access the other Participant’s
trade-throughs.5 If, however, a trade- quote, which could delay the customer’s
Self-Regulatory Organizations; Order through does occur and a complaint is transaction by thirty seconds or more, or
Approving Proposed Rule Change by received through ITS from the party (ii) become potentially liable to the
the Chicago Stock Exchange, Inc. whose bid or offer was traded through, other Participant for the amount by
Relating to Execution of Limit Orders the party who initiated the trade- which its quote was traded through.’’ 11
Following Exempted ITS Trade- through may be required to satisfy the In its Order, the Commission stated
Through bid or offer traded through or take other that the ITS trade-through provisions
remedial action.6 Each Participant were particularly restrictive in the case
November 1, 2002. Exchange, including the Phlx,7 has of the QQQs, DIAMONDs and SPDRs, as
I. Introduction adopted and obtained Commission these ETFs are highly liquid securities,
approval of a ‘‘trade-through rule,’’ and their value is derived from the
On September 20, 2002, the Chicago which is substantively the same as that values of the underlying shares. The
Stock Exchange, Inc. (‘‘CHX’’ or provided in the ITS Plan. Commission noted that immediate
‘‘Exchange’’) submitted to the Securities In a recent Order, the Commission execution of these securities might be
and Exchange Commission (‘‘SEC’’ or recognized that the ITS trade-through more important than the opportunity to
‘‘Commission’’), pursuant to section provisions were designed to encourage obtain a better price to certain
19(b)(1) of the Securities Exchange Act market participants to display their investors.12 To address this issue, the
of 1934 (‘‘Act’’),1 and Rule 19b–4 trading interest, and to help achieve best Commission granted a de minimis
thereunder,2 a proposed rule change to execution for customer orders in exemption from the trade-through
render voluntary a CHX specialist’s exchange-listed securities.8 The provisions of the ITS Plan with respect
obligation to fill limit orders in the Commission also acknowledged, to transactions in the QQQs,
specialist’s book following a primary however, that these rules were designed DIAMONDs and SPDRs that are effected
market trade-through, if such trade- at a time when ‘‘the order routing and at a price no more than three cents away
through occurs in an exchange-traded execution facilities of markets were from the best bid and offer quoted in the
funds (‘‘ETFs’’) tracking the Nasdaq–100 much slower, intermarket competition Consolidated Quote System (‘‘CQS’’).
Index (‘‘QQQs’’), the Dow Jones was less keen, and the minimum quote This exemption, which went into effect
Industrial Average (‘‘DIAMONDs’’), and increment for exchange-listed securities on September 4, 2002 and will remain
the Standard & Poor’s 500 Index was 1⁄8 of a dollar ($ 0.125).’’ 9 The in effect until June 4, 2003, allows
(‘‘SPDRs’’). Participants to execute transactions,
Commission noted that with the
The proposed rule change was through automatic execution or
introduction of decimal pricing and
published for comment in the Federal otherwise, without attempting to access
technology changes that greatly reduced
Register on October 2, 2002.3 No the quotes of other Participants when
execution times, the trade-through
comments were received on the the expected price improvement would
provisions of the ITS Plan have limited
proposal. This order approves the not be significant.13
the ability of a Participant to provide an
automated execution when a better B. Applicability to the CHX
II. Description of the Proposal price is displayed by another Participant
that does not offer automated CHX Article XX, Rules 37(a)(3) and
A. Background 37(b)(6) govern the execution of limit
executions.10 In support of this
The CHX is a participant in the conclusion, the Commission explained orders in a CHX specialist’s book.
Intermarket Trading System (‘‘ITS’’). that certain electronic systems are able Specifically, these rules require a CHX
The ITS is an order routing network to deliver executions in a fraction of a specialist to fill limit orders in his book
designed to facilitate intermarket second, while ITS participants have, at if there is a trade-through of the limit
trading in exchange-listed equity a minimum, thirty seconds to respond price in the primary market. The CHX
securities among participating self- to a commitment to trade. Because of specialist, in turn, is entitled to seek
regulatory organizations (‘‘SROs’’) based this, ‘‘an ITS Participant seeking to satisfaction for these orders pursuant to
on current quotation information the ITS Plan’s provisions governing
emanating from their markets. The The SROs participating in ITS include the trade-throughs.
terms of the linkage are governed by the American Stock Exchange LLC (‘‘Amex’’), the However, pursuant to the
ITS Plan, a national market system plan Boston Stock Exchange, Inc. (‘‘BSE’’), the Chicago Commission’s ITS Exemption Order,
Board Options Exchange, Inc. (‘‘CBOE’’), the certain primary market trade-throughs
approved by the Commission pursuant Chicago Stock Exchange, Inc. (‘‘CSE’’), the
to Section 11A of the Act and Rule Cincinnati Stock Exchange, Inc. (‘‘Cincinnati’’), the in the QQQs, DIAMONDS and SPDRs
11Aa3–2 thereunder.4 National Association of Securities Dealers, Inc. that would trigger a CHX specialist’s
(‘‘NASD’’), the New York Stock Exchange, Inc. obligation to provide trade-through
1 15 U.S.C. 78s(b)(1). (‘‘NYSE’’), the Pacific Stock Exchange, Inc. (‘‘PCX’’), protection will now be permitted, and
and the Phlx (collectively ‘‘Participant Exchanges’’).
2 17 CFR 240.19b–4. 5 A trade-through results when a member
thus will leave the CHX specialist
3 See Securities Exchange Act Release No. 46556
purchases (or sells) a security at a price that is without recourse to seek satisfaction
(September 26, 2002), 67 FR 61940. The proposed
rule change is currently in effect as a pilot. See
higher (lower) than the price offered in one or more from the primary market. Therefore, the
of the other ITS participant’s markets. See ITS Plan, Exchange is proposing to amend CHX
Securities Exchange Act Release Nos. 46577
Section 8(d)(i).
(September 26, 2002), 67 FR 61941 (October 2, 6 See ITS Plan, Exhibit B.
Article XX, Rules 37(a)(3) and 37(b)(6)
2002)(notice of immediate effectiveness of pilot for to permit, but not require, a CHX
7 See Phlx Rule 2001A.
the period September 4, 2002 to October 4, 2002);
46616 (October 8, 2002), 67 FR 63719 (October 15, 8 See Securities Exchange Act Release No. 46428 specialist to fill limit orders in his book
2002)(notice of immediate effective of extension of (August 28, 2002), 67 FR 56607 (September 4, 2002)
pilot to November 3, 2002.) at 56607 (‘‘ITS Exemption Order’’). 11 Id. at 56607–8.
4 See Securities Exchange Act Release No. 19456 9 Id. 12 Id.

(January 27, 1983), 48 FR 4938 (February 3, 1983). 10 Id. 13 Id. at 56608.

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68220 Federal Register / Vol. 67, No. 217 / Friday, November 8, 2002 / Notices

when a trade-through that is exempted SECURITIES AND EXCHANGE II. Self-Regulatory Organization’s
pursuant to the Commission’s ITS COMMISSION Statement of the Purpose of, and
Exemption Order occurs in the primary Statutory Basis for, the Proposed Rule
[Release No. 34–46762; File No. SR–CHX–
market. 2002–30]
III. Discussion In its filing with the Commission, the
Self-Regulatory Organizations; Notice Exchange included statements
After careful review, the Commission of Filing and Immediate Effectiveness concerning the purpose of and basis for
finds that the proposed rule change is of Proposed Rule Change by the the proposed rule change and discussed
consistent with the requirements of the Chicago Stock Exchange, Incorporated any comments it received regarding the
Act and the rules and regulations Relating to Eligibility of Limit Orders proposed rule change. The text of these
thereunder applicable to a national for Trade Through Protection and statements may be examined at the
Amendment No. 1 Thereto places specified in Item IV below. The
securities exchange.14 In particular, the
Commission finds that the proposed November 1, 2002. Exchange has prepared summaries, set
rule is consistent with the requirements Pursuant to section 19(b)(1) of the forth in Sections A, B and C below, of
of section 6(b)(5) of the Act 15 because Securities Exchange Act of 1934 (the the most significant aspects of such
it is designed to facilitate transactions in ‘‘Act’’),1 and Rule 19b–4 thereunder,2 statements.
securities; to remove impediments to notice hereby is given that on A. Self-Regulatory Organization’s
and perfect the mechanism of a free and September 13, 2002, the Chicago Stock Statement of the Purpose of, and
open market and a national market Exchange, Incorporated (‘‘CHX’’ or Statutory Basis for, the Proposed Rule
system; and, in general, to protect ‘‘Exchange’’) filed with the Securities Change
investors and the public interest; and is and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule 1. Purpose
not designed to permit unfair
discrimination between customers, change as described in Items I, II and III On January 11, 2002, the Commission
below, which Items have been prepared approved a proposed rule change
issuers, brokers or dealers.
by the self-regulatory organization. The submitted by the Exchange amending
By adopting the proposed exemption, Exchange filed the proposal pursuant to Article XX, Rule 37(b)(6) of the
the Exchange removes the specialist’s section 19(b)(3)(A) of the Act,3 and Rule Exchange’s rules, which, among other
obligation to provide trade-through 19b–4(f)(6) thereunder,4 which renders things, governs execution of limit orders
protection in situations where it will not the proposal effective upon filing with in the specialist’s book in the event of
be permitted to seek satisfaction through the Commission. On October 30, 2002, a trade through in the primary market.6
ITS from the primary market. This the Exchange filed Amendment No. 1 to That proposal required that a limit order
obligation was on the CHX assumed the proposed rule change.5 be resident in the specialist’s book for
voluntarily in order to make its market The Commission is publishing this a time period of 0–15 seconds (as
more attractive to sources of order flow, notice to solicit comments on the designated by the specialist) before it
not an obligation the Act imposes on a proposed rule change from interested would be eligible for limit order
market. The Commission believes that persons. protection.
the business decision to potentially I. Self-Regulatory Organization’s Another provision of the CHX rules,
forego order flow by no longer providing Statement of the Terms of Substance of however, also addresses the execution
print protection is a judgment the Act the Proposed Rule Change of agency limit orders and should have
allows the CHX to make.16 The Exchange proposes to amend been amended as part of the Exchange’s
CHX Article XX, Rule 37(a)(3) to clarify original proposal.7 Through this
IV. Conclusion submission, the Exchange modifies CHX
the rules relating to the execution of
It is therefore ordered, pursuant to limit orders in the specialist’s book in Article XX, Rule 37(a)(3) to eliminate
section 19(b)(2) of the Act,17 that the the event of a trade through in the any confusion about the impact of the
primary market. The proposed rule earlier rule change.
proposed rule change (SR–CHX–2002–
31) is approved. change mirrors a change made to 2. Statutory Basis
another CHX rule relating to the
For the Commission, by the Division of automated execution of limit orders, The CHX believes that the proposed
Market Regulation, pursuant to delegated which required that a limit order be rule change is consistent with the
authority.18 resident in the specialist’s book for a requirements of the Act and the rules
Jill M. Peterson, time period of 0–15 seconds (as and regulations thereunder that are
Assistant Secretary. designated by the specialist) before it applicable to a national securities
[FR Doc. 02–28428 Filed 11–7–02; 8:45 am] would be eligible for limit order exchange, and, in particular, with the
protection. The text of the proposed rule requirements of section 6(b).8
change is available from the Office of Specifically, the proposed rule is
the Secretary, the Commission, and the consistent with section 6(b)(5) of the
CHX. Act 9 in that it is designed to promote
14 In approving this rule proposal, the just and equitable principles of trade, to
Commission notes that it has also considered the 1 15 U.S.C. 78s(b)(1). remove impediments and to perfect the
proposed rule’s impact on efficiency, competition, 2 17 CFR 240.19b–4. mechanism of a free and open market
and capital formation. 15 U.S.C. 78c(f). 3 15 U.S.C. 78s(b)(3)(A).
and a national market system, and, in
15 15 U.S.C. 78f(b)(5). 4 17 CFR 240.19b–4(f)(6).

16 The Commission notes that the CHX’s proposed 5 See letter from Kathleen M. Boege, Assistant
6 See Securities Exchange Act Release No. 45271,
rule change will remain in effect only until the General Counsel, CHX, to Nancy J. Sanow, Assistant
66 FR 2712 (January 18, 2002)(order approving SR–
expiration of the Commission’s ITS Exemption Director, Division of Market Regulation,
Commission, dated October 29, 2002 (‘‘Amendment
Order on June 4, 2003. 7 See CHX Article XX, Rule 37(a)(3).
No. 1’’). In Amendment No. 1, the Exchange
17 15 U.S.C. 78f(b)(2). 8 15 U.S.C. 78f(b).
corrected typographical errors contained in the
18 17 CFR 200.30–3(a)(12). proposed rule text. 9 15 U.S.C. 78f(b)(5).

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