Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto To Amend Article XX, Rule 37(a)(3) of Its Rules To Eliminate Its Requirement That Specialists Guarantee Execution of Limit Orders When Certain Conditions Occur in Another Market, 40760-40762 [E5-3743]

Download as PDF 40760 Federal Register / Vol. 70, No. 134 / Thursday, July 14, 2005 / Notices thereunder,2 to add an alternative to the current procedures that apply to the assignment of orders on the Exchange’s Retail Automatic Execution System (‘‘RAES’’) to CBOE market-makers logged on to participate in RAES. The proposed rule change was published for comment in the Federal Register on May 18, 2005.3 The Commission received no comments on the proposal. This order approves the proposed rule change. II. Description of the Proposal CBOE Rule 6.8 governs the execution of orders on RAES. CBOE Rule 6.8.06 sets forth alternatives available to the appropriate Floor Procedure Committee to implement the procedures for the assignment of RAES-eligible orders to CBOE market-makers logged onto RAES for execution. One alternative set forth in current Rule 6.8.06(c), the ‘‘100 Spoke RAES Wheel,’’ assigns RAES orders to logged-in market-makers based on the percentage of their in-person agency contracts traded in that class (excluding RAES contracts traded) compared to all of the market-maker inperson agency contracts traded (excluding RAES contracts) during the review period. The proposed rule change sets forth a new alternative, available only in index option classes, that offers a wheel with 1000 spokes and assignment procedures that are similar to the assignment procedures applicable to the 100 Spoke RAES Wheel. Under the proposed 1000 Spoke RAES Wheel, the appropriate Floor Procedure Committee will determine on a class-by-class basis whether the assignment of RAES orders to logged-in market-makers is based on the percentage of a market-maker’s contracts traded in that index option class (excluding RAES contracts traded) compared to all market-maker contracts traded (excluding RAES contracts) during the review period, or the percentage of the market-maker’s inperson agency contracts traded in that class (excluding RAES contracts traded) compared to all market-maker in-person agency contracts traded (excluding RAES contracts) during the review period. As is the case with the 100 Spoke RAES Wheel, the procedure for the 1000 Spoke RAES Wheel would provide that on each revolution of the wheel, each participating market-maker who is logged in RAES at the time will be assigned a number of contracts that approximates the percentage of 2 17 CFR 240.19b–4. Securities Exchange Act Release No. 51684 (May 11, 2005), 70 FR 28588. 3 See VerDate jul<14>2003 18:32 Jul 13, 2005 Jkt 205001 contracts on RAES that the marketmaker traded in-person in that index option class during the review period, subject to the restrictions set forth in current Rule 6.8.06(c). The effect of utilizing the 1000 Spoke RAES Wheel instead of the 100 Spoke RAES Wheel is that the number of contracts allocated to a market-maker will increase by a factor of 10 for every revolution of the RAES wheel. This procedure is designed to reduce the rounding effects that result under the 100 Spoke RAES Wheel (the RAES system configuration rounds contracts to the nearest whole number). III. Discussion After careful consideration, the Commission finds that the proposed rule change is consistent with the requirements of Section 6(b) of the Exchange Act 4 and the rules and regulations thereunder applicable to a national securities exchange.5 In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Exchange Act,6 which requires, among other things, that the Exchange’s rules 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. The Commission believes that the proposal to add the alternative of the 1000 Spoke RAES Wheel would provide the Exchange with a greater degree of flexibility in allocating index option contracts that are executed automatically through RAES. The Exchange initially developed the 100 Spoke RAES Wheel as a means to allocate contracts executed through RAES according to the liquidity each market-maker provided on the floor. The Exchange asserted in its proposal, however, that the Floor Procedure Committees for index options have not employed the 100 Spoke RAES Wheel alternative because of the effects of rounding of that allocation method in larger trading crowds. The Commission believes that, with the 1000 Spoke RAES Wheel alternative, market-makers in index options would have a greater incentive to compete effectively for orders, and this, in turn, should benefit investors and promote the public interest. The Commission notes that implementation of the 1000 Spoke U.S.C. 78f(b). approving the proposed rule change, the Commission has considered its impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 6 15 U.S.C. 78f(b)(5). PO 00000 4 15 5 In Frm 00076 Fmt 4703 Sfmt 4703 RAES Wheel, as with the 100 Spoke RAES Wheel, will have no effect on the prices offered to customers. Under CBOE Rule 6.8(d)(i), RAES automatically provides to each retail customer order an execution price, generally determined by the prevailing market quote at the time of the order’s entry into the system. The 1000 Spoke RAES Wheel simply provides for another method of contract allocation in the case of index option contracts automatically executed through RAES. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act,7 that the proposed rule change (SR– CBOE–2005–24) be, and it hereby is, approved. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.8 J. Lynn Taylor, Assistant Secretary. [FR Doc. E5–3745 Filed 7–13–05; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–51997; File No. SR–CHX– 2004–17] Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto To Amend Article XX, Rule 37(a)(3) of Its Rules To Eliminate Its Requirement That Specialists Guarantee Execution of Limit Orders When Certain Conditions Occur in Another Market July 8, 2005. 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 June 21, 2004, 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 CHX. On July 5, 2005, the Exchange filed an amendment to the proposed rule change.3 The Commission is publishing this notice to solicit 7 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Amendment No. 1 dated July 5, 2005, replacing the original filing in its entirety. In Amendment No. 1, the Exchange modified the text of the proposed rule change and the discussion in response to comments by the Commission staff. 8 17 E:\FR\FM\14JYN1.SGM 14JYN1 Federal Register / Vol. 70, No. 134 / Thursday, July 14, 2005 / Notices 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 CHX Article XX, Rule 37(a)(3), which provides for execution of resting CHX limit orders based on activity in other markets, to permit, but not require, CHX specialists to guarantee execution of such limit orders when certain conditions occur in another market. The text of the proposed rule change, as amended, is available on CHX’s Web site (https://www.chx.com/marketreg/ proposed rules.htm), at CHX’s principal office, and at the Commission’s Public Reference Room. 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 Changes 1. Purpose The Exchange proposes to amend Article XX, Rule 37(a) of the CHX Rules, which provides for execution of resting CHX limit orders based on activity in other markets. The proposed rule change would permit, but not require, CHX specialists to guarantee execution of such limit orders when certain conditions occur in another market. Background CHX Article XX, Rule 37(a)(3) sets out specific execution guarantees for eligible limit orders. For listed issues, the rule generally obligates a CHX specialist to guarantee execution of limit orders resting in the specialist’s book, when the issue is being traded in the primary market at a price equal to or better than the limit price. For NASDAQ/NM securities, the rule permits, but does not require, a CHX specialist to guarantee execution of limit orders resting in the specialist’s book, when another market center’s quotation locks or crosses the limit price. VerDate jul<14>2003 18:32 Jul 13, 2005 Jkt 205001 The guarantees set forth in CHX Article XX, Rule 37(a)(3), commonly referred to as ‘‘limit order protection’’ or ‘‘primary market protection,’’ were adopted voluntarily by the CHX over 15 years ago, as a means of attracting order flow. As noted by the Commission, the Exchange’s initiatives relating to primary market protection were intended to ensure ‘‘* * * fair competition among exchange markets, which benefits public investors.’’ 4 Industry Changes Since Adoption of the Execution Guarantees As our industry has evolved, the Exchange’s principal competitors for order flow, namely ‘‘third market’’ execution venues and alternative trading systems, do not provide such limit order protection guarantees. Accordingly, the Exchange believes that the guarantees no longer serve a clear competitive purpose. This is particularly the case in recent years, since CHX order-sending firms now have free access to comprehensive monthly order execution quality statistics, rendering ‘‘front-end’’ execution guarantees unnecessary as a means of attracting order flow. Firms are able to closely monitor execution quality and, thereby, ensure that they are meeting their best execution obligations, without relying on rulebased guarantees.5 Compounding the lack of competitive value, the guarantees currently subject CHX specialists to exposure that was never intended when the rule-based guarantees were enacted. Since the securities industry conversion to decimal trading, the availability of liquidity at a best bid or offer (‘‘BBO’’) price point has declined, in many cases significantly. The CHX specialist, if he chooses to offset his positions in 4 See Securities Exchange Act Release No. 32124 (April 13, 1993), 58 FR 21325 (April 20, 1993). The Exchange believes that other regional exchanges have enacted similar rule-based guarantees. See, e.g., BSE Chapter II, Section 33, Interpretation and Policy .01, NSX Rule 11.9, and Phlx Rule 229. The Exchange believes that the rule-based guarantees were enacted on a strictly voluntary basis and were not required by the Act or by any requirement promulgated by Congress or the Commission in accordance with the Act, including the Order Handling Rules issued by the Commission in 1996. See Securities Exchange Act Release No. 37619A (September 6, 1996), 61 FR 48290 (September 12, 1996). The standards for execution of limit orders set forth in the Order Handling Rules do not require that best execution be measured on an order-byorder basis. Rather, they contemplate evaluation using aggregate standards. 5 The Exchange notes the dramatic increase in market share that has been achieved by several of the Exchange’s third market competitors as evidence that order-sending firms no longer consider rule-based execution guarantees essential to their order-routing decisions, or presumably to satisfaction of their best execution obligations. PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 40761 another market, often encounters great difficulty in accessing liquidity at the price that he is obligated to provide. This is particularly true in the case of manually-executed orders, given the associated time latency and the frequency with which quotes in other markets are changing. Many CHX specialists, thus, believe that it is no longer appropriate to mandate that specialists guarantee execution of resting limit orders for listed issues, based on activity in other market centers. Indeed, they believe that in today’s trading environment, the limit order execution guarantee exposes them to unwarranted liability, which they often have limited ability to mitigate.6 In short, the CHX believes that the environment has changed significantly since it voluntarily enacted its rulebased execution guarantees, warranting the amendments proposed by the CHX. The CHX believes that the guarantees no longer foster significant competition between markets. Absent this benefit to investors, the Exchange believes that there is no legal basis for continuing to mandate such guarantees, which, as discussed above, are not required under the Act or other requirements promulgated by Congress or the Commission. Accordingly, the Exchange believes that it is appropriate to render such guarantees voluntary, on the terms outlined below. Proposed Rule Change Under the proposed revision to CHX Article XX, Rule 37(a)(3), the mandate that CHX specialists guarantee execution of resting limit orders for listed issues, based on triggering activity in other markets, would be deleted. Instead, the amended rule would permit CHX specialists to continue to provide such guarantees solely on an issue-byissue basis, on non-discriminatory terms approved by the Exchange. The Exchange’s existing functionality providing for automated execution of resting limit orders would remain available for CHX specialists who elect to continue to guarantee limit order protection.7 6 In fact, the exposure of a CHX specialist exceeds that of a specialist on the primary market, whose best execution obligation effectively requires only that he guarantee a limit order execution, if another market executes an order at a price better than the limit price. Under the current CHX rule, the CHX specialist is required to execute a limit order, if the primary market executes an order at the limit price. 7 The Exchange anticipates that for the foreseeable future, CHX specialists would continue to provide limit order protection voluntarily, using the criteria for voluntary limit order protection currently set forth in CHX Article XX, Rule 37(a)(3). E:\FR\FM\14JYN1.SGM Continued 14JYN1 40762 Federal Register / Vol. 70, No. 134 / Thursday, July 14, 2005 / Notices Significantly, deletion of the rulebased mandate regarding limit order protection would not remove a CHX specialist’s obligation to provide a timely best execution for each order, nor would it modify any other specialist obligations set forth in CHX Article XXX of the CHX Rules. The CHX Department of Market Regulation would continue its surveillance of order executions to ensure that CHX specialists meet all of their obligations to each order. Accordingly, many CHX specialists would continue to execute resting limit orders for listed issues voluntarily, when quotes or executions at the limit price occur in other markets, as a means of satisfying their best execution obligations and maintaining superior execution quality statistics. 2. Statutory Basis The Exchange believes that the proposal, as amended, 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) of the Act.8 Specifically, the CHX believes that the proposal, as amended, 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 of Burden on Competition The Exchange does not believe that the proposed rule change, as amended, will impose any burden on competition. C. Self-Regulatory Organization’s Statement on Comments Regarding the Proposed Rule Changes Received From Members, Participants or Others No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Changes and Timing for Commission Action Within 35 days of the date of publication of this notice in the Federal Register or within such other 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 To the extent that the Exchange approved some variation in the limit order protection criteria, the Exchange would notify all CHX participants of this change. 8 15 U.S.C. 78f(b). 9 15 U.S.C. 78f(b)(5). VerDate jul<14>2003 18:32 Jul 13, 2005 Jkt 205001 (ii) as to which the self-regulatory organization 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. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as amended, is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–CHX–2004–17 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–9303. All submissions should refer to File No. SR–CHX–2004–17. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). 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 comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File No. SR–CHX–2004–17 and should be submitted on or before August 4, 2005. PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 For the Commission, by the Division of Market Regulation, pursuant to delegated authority.10 J. Lynn Taylor, Assistant Secretary. [FR Doc. E5–3743 Filed 7–13–05; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–52000; File No. SR–ISE– 2005–21] Self-Regulatory Organizations; International Securities Exchange, Inc.; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change and Amendments No. 1 and 2 Thereto To Amend Its Summary Fine Schedule for Position Limit Violations July 8, 2005. 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 June 15, 2005, the International Securities Exchange, Inc. (‘‘Exchange’’ or ‘‘ISE’’) 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 ISE. On June 23, 2005, the Exchange filed Amendment No. 1 to the proposed rule change.3 On July 7, 2005, the Exchange filed Amendment No. 2 to the proposed rule change.4 The Commission is publishing this notice and order to solicit comments on the proposed rule change, as amended, from interested persons and to approve the proposal on an accelerated basis. 10 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 In Amendment No. 1, the Exchange amended the proposed rule change such that under proposed ISE Rule 1614(d)(1)(B): (1) fines for member accounts would be based on the number of violations in any 12-month rolling period and not within one calendar year; and (2) the $5,000 fine proposed by the Exchange would be for the fourth and each subsequent offense and not just for the fourth offense. 4 In Amendment No. 2, the Exchange added a footnote to ISE Rules 1614(d)(1)(A) and (B) providing that (i) a one-trade date overage, (ii) a consecutive string of trade date overage violations where the position does not change or where a steady reduction in the overage occurs, or (iii) a consecutive string of trade violations resulting from other mitigating circumstances, may be deemed to constitute one offense, provided that the violations are inadvertent. 1 15 E:\FR\FM\14JYN1.SGM 14JYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 70, Number 134 (Thursday, July 14, 2005)]
[Notices]
[Pages 40760-40762]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-3743]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51997; File No. SR-CHX-2004-17]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto To 
Amend Article XX, Rule 37(a)(3) of Its Rules To Eliminate Its 
Requirement That Specialists Guarantee Execution of Limit Orders When 
Certain Conditions Occur in Another Market

July 8, 2005.
    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 June 21, 2004, 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 CHX. On July 5, 
2005, the Exchange filed an amendment to the proposed rule change.\3\ 
The Commission is publishing this notice to solicit

[[Page 40761]]

comments on the proposed rule change, as amended, from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Amendment No. 1 dated July 5, 2005, replacing the 
original filing in its entirety. In Amendment No. 1, the Exchange 
modified the text of the proposed rule change and the discussion in 
response to comments by the Commission staff.
---------------------------------------------------------------------------

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

    The Exchange proposes to amend CHX Article XX, Rule 37(a)(3), which 
provides for execution of resting CHX limit orders based on activity in 
other markets, to permit, but not require, CHX specialists to guarantee 
execution of such limit orders when certain conditions occur in another 
market. The text of the proposed rule change, as amended, is available 
on CHX's Web site (https://www.chx.com/marketreg/proposed rules.htm), at 
CHX's principal office, and at the Commission's Public Reference Room.

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 Changes

1. Purpose
    The Exchange proposes to amend Article XX, Rule 37(a) of the CHX 
Rules, which provides for execution of resting CHX limit orders based 
on activity in other markets. The proposed rule change would permit, 
but not require, CHX specialists to guarantee execution of such limit 
orders when certain conditions occur in another market.

Background

    CHX Article XX, Rule 37(a)(3) sets out specific execution 
guarantees for eligible limit orders. For listed issues, the rule 
generally obligates a CHX specialist to guarantee execution of limit 
orders resting in the specialist's book, when the issue is being traded 
in the primary market at a price equal to or better than the limit 
price. For NASDAQ/NM securities, the rule permits, but does not 
require, a CHX specialist to guarantee execution of limit orders 
resting in the specialist's book, when another market center's 
quotation locks or crosses the limit price.
    The guarantees set forth in CHX Article XX, Rule 37(a)(3), commonly 
referred to as ``limit order protection'' or ``primary market 
protection,'' were adopted voluntarily by the CHX over 15 years ago, as 
a means of attracting order flow. As noted by the Commission, the 
Exchange's initiatives relating to primary market protection were 
intended to ensure ``* * * fair competition among exchange markets, 
which benefits public investors.'' \4\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 32124 (April 13, 
1993), 58 FR 21325 (April 20, 1993). The Exchange believes that 
other regional exchanges have enacted similar rule-based guarantees. 
See, e.g., BSE Chapter II, Section 33, Interpretation and Policy 
.01, NSX Rule 11.9, and Phlx Rule 229. The Exchange believes that 
the rule-based guarantees were enacted on a strictly voluntary basis 
and were not required by the Act or by any requirement promulgated 
by Congress or the Commission in accordance with the Act, including 
the Order Handling Rules issued by the Commission in 1996. See 
Securities Exchange Act Release No. 37619A (September 6, 1996), 61 
FR 48290 (September 12, 1996). The standards for execution of limit 
orders set forth in the Order Handling Rules do not require that 
best execution be measured on an order-by-order basis. Rather, they 
contemplate evaluation using aggregate standards.
---------------------------------------------------------------------------

Industry Changes Since Adoption of the Execution Guarantees

    As our industry has evolved, the Exchange's principal competitors 
for order flow, namely ``third market'' execution venues and 
alternative trading systems, do not provide such limit order protection 
guarantees. Accordingly, the Exchange believes that the guarantees no 
longer serve a clear competitive purpose. This is particularly the case 
in recent years, since CHX order-sending firms now have free access to 
comprehensive monthly order execution quality statistics, rendering 
``front-end'' execution guarantees unnecessary as a means of attracting 
order flow. Firms are able to closely monitor execution quality and, 
thereby, ensure that they are meeting their best execution obligations, 
without relying on rule-based guarantees.\5\
---------------------------------------------------------------------------

    \5\ The Exchange notes the dramatic increase in market share 
that has been achieved by several of the Exchange's third market 
competitors as evidence that order-sending firms no longer consider 
rule-based execution guarantees essential to their order-routing 
decisions, or presumably to satisfaction of their best execution 
obligations.
---------------------------------------------------------------------------

    Compounding the lack of competitive value, the guarantees currently 
subject CHX specialists to exposure that was never intended when the 
rule-based guarantees were enacted. Since the securities industry 
conversion to decimal trading, the availability of liquidity at a best 
bid or offer (``BBO'') price point has declined, in many cases 
significantly. The CHX specialist, if he chooses to offset his 
positions in another market, often encounters great difficulty in 
accessing liquidity at the price that he is obligated to provide. This 
is particularly true in the case of manually-executed orders, given the 
associated time latency and the frequency with which quotes in other 
markets are changing.
    Many CHX specialists, thus, believe that it is no longer 
appropriate to mandate that specialists guarantee execution of resting 
limit orders for listed issues, based on activity in other market 
centers. Indeed, they believe that in today's trading environment, the 
limit order execution guarantee exposes them to unwarranted liability, 
which they often have limited ability to mitigate.\6\
---------------------------------------------------------------------------

    \6\ In fact, the exposure of a CHX specialist exceeds that of a 
specialist on the primary market, whose best execution obligation 
effectively requires only that he guarantee a limit order execution, 
if another market executes an order at a price better than the limit 
price. Under the current CHX rule, the CHX specialist is required to 
execute a limit order, if the primary market executes an order at 
the limit price.
---------------------------------------------------------------------------

    In short, the CHX believes that the environment has changed 
significantly since it voluntarily enacted its rule-based execution 
guarantees, warranting the amendments proposed by the CHX. The CHX 
believes that the guarantees no longer foster significant competition 
between markets. Absent this benefit to investors, the Exchange 
believes that there is no legal basis for continuing to mandate such 
guarantees, which, as discussed above, are not required under the Act 
or other requirements promulgated by Congress or the Commission. 
Accordingly, the Exchange believes that it is appropriate to render 
such guarantees voluntary, on the terms outlined below.

Proposed Rule Change

    Under the proposed revision to CHX Article XX, Rule 37(a)(3), the 
mandate that CHX specialists guarantee execution of resting limit 
orders for listed issues, based on triggering activity in other 
markets, would be deleted. Instead, the amended rule would permit CHX 
specialists to continue to provide such guarantees solely on an issue-
by-issue basis, on non-discriminatory terms approved by the Exchange. 
The Exchange's existing functionality providing for automated execution 
of resting limit orders would remain available for CHX specialists who 
elect to continue to guarantee limit order protection.\7\
---------------------------------------------------------------------------

    \7\ The Exchange anticipates that for the foreseeable future, 
CHX specialists would continue to provide limit order protection 
voluntarily, using the criteria for voluntary limit order protection 
currently set forth in CHX Article XX, Rule 37(a)(3). To the extent 
that the Exchange approved some variation in the limit order 
protection criteria, the Exchange would notify all CHX participants 
of this change.

---------------------------------------------------------------------------

[[Page 40762]]

    Significantly, deletion of the rule-based mandate regarding limit 
order protection would not remove a CHX specialist's obligation to 
provide a timely best execution for each order, nor would it modify any 
other specialist obligations set forth in CHX Article XXX of the CHX 
Rules. The CHX Department of Market Regulation would continue its 
surveillance of order executions to ensure that CHX specialists meet 
all of their obligations to each order. Accordingly, many CHX 
specialists would continue to execute resting limit orders for listed 
issues voluntarily, when quotes or executions at the limit price occur 
in other markets, as a means of satisfying their best execution 
obligations and maintaining superior execution quality statistics.
2. Statutory Basis
    The Exchange believes that the proposal, as amended, 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) of the Act.\8\ 
Specifically, the CHX believes that the proposal, as amended, 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.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement of Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, will impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments Regarding the 
Proposed Rule Changes Received From Members, Participants or Others

    No written comments were either solicited or received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such other 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 self-regulatory organization 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CHX-2004-17 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File No. SR-CHX-2004-17. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (https://www.sec.gov/rules/
sro.shtml). 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 comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File No. SR-CHX-2004-17 and should be submitted on or before August 4, 
2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-3743 Filed 7-13-05; 8:45 am]
BILLING CODE 8010-01-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.