# Self-Regulatory Organizations; the Chicago Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change Relating to the Prohibition of Trade Shredding, 13642-13643 [E6-3806]

## Agencies

[Federal Register Volume 71, Number 51 (Thursday, March 16, 2006)]
[Notices]
[Pages 13642-13643]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-3806]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53441; File No. SR-CHX-2006-03]

Self-Regulatory Organizations; the Chicago Stock Exchange, Inc.;
Notice of Filing of Proposed Rule Change Relating to the Prohibition of

March 8, 2006.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934, as amended, (Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is
hereby given that on January 24, 2006, 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. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

The Exchange proposes to amend its rules to prohibit trade
shredding.'' The text of the proposed rule change appears below.

ARTICLE IX

* * *

Breaking Up Orders

RULE 18. No Participant shall break customer orders into multiple
smaller orders for the primary purpose of maximizing rebates or other
payments to the Participant without regard for the customer's interest.

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
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 the
Statutory Basis for, the Proposed Rule Change

1. Purpose
The Commission has expressed concern that participants in the U.S.
securities markets may be engaging in the practice of trade
shredding.'' Trade shredding'' is the practice of unbundling customer
orders for securities into multiple smaller orders for the primary
purpose of maximizing payments to the participant or participant firm.
The Commission has noted that firms might engage in this practice to
maximize the market data rebates available to them from self-regulatory
organizations.\3\ Unbundling customer orders also could have the effect
of causing customers to pay (and participant firms to receive)
excessive fees or commissions or could result in situations where
customer orders are not receiving best execution.
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\3\ The Commission has noted that the changes to the market data
revenue formulas as a result of Regulation NMS were developed, at
least in part, to respond to concerns relating to trade
shredding.''
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The Commission has requested that self-regulatory organizations
the Exchange does not currently rebate market data fees to its order-
sending firms--and therefore does not believe that its order-sending
firms have an incentive to engage in the practice of trade shredding
with respect to orders sent to the Exchange--the Exchange believes that
it is appropriate to implement a rule that would prohibit this type of
inappropriate practice. Specifically, new Rule 18, in Article IX of the
Exchange's Rules, would prohibit an Exchange participant from breaking
customer orders into smaller multiple orders for the primary purpose of
maximizing rebates or other payments to the participant without regard
for the customer's interest.
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\4\ Other self-regulatory organizations have submitted these
types of rules in response to the Commission's request. See e.g.,
NYSE Rule 123G (approved by Securities Exchange Act Release No.
52683 (October 26, 2005), 70 FR 66480 (November 2, 2005)).

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[[Page 13643]]

2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the
Act,\5\ in general, and furthers the objectives of Section 6(b)(5) of
the Act,\6 \in particular, in that it is designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, 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 by ensuring that Exchange
participants, like participants in other markets, are prohibited from
engaging in the practice of trade shredding.
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\5\ 15 U.S.C. 78f(b).
\6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule changes 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

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 self-regulatory organization 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.

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. Comments may be submitted by any of
the following methods:

Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
File Number SR-CHX-2006-03 on the subject line.

Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CHX-2006-03. This file
number should be included on the subject line if e-mail is used. To
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://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 also will be available for inspection and copying at the
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 Number
SR-CHX-2006-03 and should be submitted on or before April 6, 2006.

For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\7 \
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\7\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-3806 Filed 3-15-06; 8:45 am]
BILLING CODE 8010-01-P