Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Order Granting Approval To Proposed Rule Change and Amendment Nos. 1 and 2 Thereto and Notice of Filing and Order Granting Accelerated Approval to Amendment Nos. 3 and 4 Thereto Relating to Records of Orders and Executions, 27758-27762 [E6-7257]
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27758
Federal Register / Vol. 71, No. 92 / Friday, May 12, 2006 / Notices
relating to the e-DPM membership
ownership requirement. That rule
currently provides that, until July 12,
2007, each e-DPM organization is
required to (i) own one Exchange
membership for every 30 products
allocated to the e-DPM; or (ii) lease one
Exchange membership for every 20
products allocated to the e-DPM. After
July 12, 2007, each e-DPM organization
is required to own one Exchange
membership for every 30 products
allocated to the e-DPM.
The rule currently also makes clear
that an Exchange ‘‘membership’’
includes a transferable regular
membership or a Chicago Board of
Trade full membership that has
effectively been exercised pursuant to
Article Fifth(b) of the Certificate of
Incorporation, and that memberships
used to satisfy the requirement may not
be used for any other purpose including
being leased to another member, to
comply with the DPM membership
ownership requirement of CBOE Rule
8.85(e), or for trading on the Exchange’s
trading floor.
The proposed rule change proposes to
make clear that a parent company of an
e-DPM entity may own or lease the
required memberships on behalf of the
e-DPM entity provided such
memberships are dedicated solely to the
e-DPM organization’s e-DPM activity.
For example, corporation XYZ owns
multiple CBOE memberships and
wholly owns e-DPM firm ABC. If some
or all of the memberships owned by
XYZ are used by ABC in connection
with its e-DPM activity, those
memberships would satisfy the
requirements of CBOE Rule 8.92(d).
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the Act
and the rules and regulations under the
Act applicable to a national securities
exchange and, in particular, the
requirements of section 6(b) of the Act.3
Specifically, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 4 requirements that
the rules of an exchange 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.
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B. Self-Regulatory Organization’s
Statement on Burden on Competition
CBOE does not believe that the
proposed rule change will impose any
burden on competition not necessary or
3 15
U.S.C. 78f(b).
4 15 U.S.C. 78f(b)(5).
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appropriate in furtherance of the
purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
No written comments were solicited
or received with respect to the proposed
rule change.
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 CBOE 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.
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–CBOE–2006–39 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–CBOE–2006–39. 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
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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
Section, 100 F Street, NE., Washington,
DC 20549. Copies of such filing also will
be available for inspection and copying
at the principal office of the CBOE. 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
Number SR–CBOE–2006–39 and should
be submitted on or before June 2, 2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.5
Nancy M. Morris,
Secretary.
[FR Doc. E6–7267 Filed 5–11–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–53772; File No. SR–CHX–
2004–38]
Self-Regulatory Organizations;
Chicago Stock Exchange, Inc.; Order
Granting Approval To Proposed Rule
Change and Amendment Nos. 1 and 2
Thereto and Notice of Filing and Order
Granting Accelerated Approval to
Amendment Nos. 3 and 4 Thereto
Relating to Records of Orders and
Executions
May 8, 2006.
I. Introduction
On November 3, 2004, the Chicago
Stock Exchange, Inc. (‘‘CHX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend CHX Article XX, Rule 24 to
require on-floor participants to
electronically record specific details
about orders originating on or off the
floor of the Exchange for execution on
the Exchange, as well as orders issued
from the floor of the Exchange to any
other market or trading venue. On July
3, 2005 and September 8, 2005, the
5 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 71, No. 92 / Friday, May 12, 2006 / Notices
Exchange filed Amendment Nos. 1 3 and
2 4 to the proposed rule change,
respectively. The proposed rule change,
as amended by Amendment Nos. 1 and
2, was published for comment in the
Federal Register on November 18,
2005.5 The Commission received no
comments on the proposal, as amended
by Amendment Nos. 1 and 2. On
December 13, 2005, the CHX filed
Amendment No. 3 to the proposed rule
change.6 On May 3, 2006, the CHX filed
Amendment No. 4 to the proposed rule
change.7 This order approves the
proposed rule change, as amended by
Amendment Nos. 1 and 2; grants
3 See
Amendment No. 1 dated July 3, 2005.
Amendment No. 2 dated September 8, 2005.
5 See Securities Exchange Act Release No. 52766
(November 10, 2005), 70 FR 70002 (‘‘Notice’’).
6 See Amendment No. 3 dated December 12,
2005. Amendment No. 3 clarified that while the
Exchange’s systems are the only systems currently
recognized by the Exchange for the collection and
recording of the required information, Exchange
participants ultimately could develop their own
systems for collecting and recording that
information so long as the systems provide the data
in a format acceptable to the Exchange; the
Brokerplex system is available to all floor
participants who request the system and pay any
applicable fees; and the Exchange is making
changes to its existing Brokerplex system to permit
this proposal to be implemented. Brokerplex is the
Exchange’s floor broker order management system
that can be used by CHX floor brokers to manage
their orders, route orders to the Exchange’s cospecialists for execution, and report executed
trades. It is not an order execution system, although
it can send orders to the CHX’s MAX system. See
infra note 15 (describing the MAX system). The
Commission notes that the Exchange does not
currently impose a separate fee for use of the
Brokerplex system, and to the extent that the
Exchange ever contemplates imposing such a fee it
would need to file a rule change with the
Commission under Section 19(b) of the Act and
Rule 19(b)(4) thereunder.
7 See Amendment No. 4 dated May 3, 2006. In
addition to clarifying changes to the rule text,
Amendment No. 4 adds Interpretation and Policy
.10 to the proposed rule to specify a compliance
date of May 8, 2006 by which the Exchange’s onfloor participants must comply with the rule. In
addition, Amendment No. 4 confirms that the
Exchange’s systems will permit a floor broker, when
identifying the side of the market on which an order
is received, to attach a special designation to a cross
order (which will be attached to the side of the
market designation in field (b)(6)) when, on account
of the customer’s instructions and to the extent
permitted by the Exchange’s rules, that order cannot
be immediately executed. Amendment No. 4 also
clarifies Interpretation and Policy .02 to specify that
records must be kept pursuant to the proposed rule
change for orders delivered orally or telephonically
to a specialist at the post. Finally, in Amendment
No. 4, the Exchange represented that (1) it will
notify its participants that they should notify the
Exchange if they believe that an Exchange system
does not permit them to enter all of the information
required by the proposed rule, as permitted by
Interpretation and Policy .05; (2) it will consider
further changes to CHX Rule 24 in response to
changes to Commission or Exchange rules; and (3)
it believes that with respect to immediately
executed orders, it receives all of the information
necessary to conduct surveillance through the
information required under Interpretation and
Policy .07 and other Exchange systems.
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4 See
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accelerated approval to Amendment
Nos. 3 and 4 to the proposed rule
change; and solicits comments from
interested persons on Amendment Nos.
3 and 4.
II. Description of the Proposal
Under the proposed rule change, the
Exchange proposes to require its floor
participants to provide particular data
about all orders originating on or off the
floor of the Exchange for execution on
the Exchange, as well as all orders
issued from the floor of the Exchange to
any other market or trading venue.8
Specifically, the Exchange proposes to
require floor participants to record, in
electronic systems designated by the
Exchange, the following details about
each covered order: (1) The symbol of
the security; (2) the clearing participant;
(3) an order identifier that uniquely
identifies the order; 9 (4) the identity of
the participant recording the order
details; (5) the number of shares or
quantity of the security; (6) the side of
the market; (7) a designation of the order
type (e.g., market, limit, stop, stop
limit); (8) whether the order is agency or
professional; 10 (9) whether the order is
being handled pursuant to Section
11(a)(1)(G) of the Act and any applicable
rules thereunder; (10) whether the order
is short or short exempt; (11) whether
the order is a bona fide arbitrage order;
(12) any limit price and/or stop price;
(13) the date and time of order receipt
or transmission (as applicable); (14) the
market, off-floor firm, or on-floor
8 The Exchange represents that this proposal is
consistent with recommendations made by the
independent consultant retained by the Exchange
under its recent settlement agreement with the
Commission. See Securities Exchange Act Release
No. 48566 (September 30, 2003), Administrative
Proceeding File No. 3–11282. See also Notice, supra
note 5, at note 13.
The Commission notes that the Exchange recently
amended CHX Article V, Rule 4 to prohibit
Exchange participants from using any
communications means to send orders to another
market for execution (‘‘layoff service’’), unless that
layoff service has established a process for
providing the Exchange with specific information
about the orders and the executions that
participants receive. See Securities Exchange Act
Release No. 52534 (September 29, 2005), 70 FR
58500 (October 6, 2005) (SR–CHX–2004–25). In
addition, the Exchange has represented that the
Exchange’s staff will present to the Exchange’s
Board of Directors a separate rule that confirms the
record-keeping obligations of its off-floor
participants. See Notice, supra note 5, at note 16.
9 This order identifier does not change when
modifications are made to the order, or when it is
cancelled, allowing any changes to be tracked back
to the original order.
10 The Exchange’s rules define a ‘‘professional’’
order as one that is for the account of a brokerdealer, the account of an associated person of a
broker-dealer, or any account in which a brokerdealer or an associated person of a broker-dealer has
any direct or indirect interest. See CHX Article
XXX, Rule 2, Interpretation and Policy .04.
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27759
participant to which the order was
transmitted or from which the order was
received (if applicable); (15) the order’s
time in force; (16) designation as held or
not held; (17) any special conditions or
instructions (e.g., any customer display
or do-not-display instructions or any allor-none conditions); (18) any
modifications that are made to the
details set out in (1) through (17) above
or (20) below, for all or part of the order,
or any cancellation of all or part of the
order; (19) the date and time of receipt
or transmission of any modifications to,
or cancellation of, the order; (20) the
date and time of any order expiration;
(21) the identity of the party cancelling
or modifying the order; (22) the
transaction price, if applicable; (23) the
number of shares executed, if
applicable; (24) the date and time of
execution, if applicable; (25) the contra
party to the execution (if applicable);
(26) the settlement instructions
associated with the order, if applicable;
(27) system-generated time(s) of
recording required information; and (28)
any other information that may be
required by the Exchange from time to
time.11 Floor participants would be
required to record this information
immediately after that information is
received or becomes available.12
In addition, proposed new
Interpretations and Policies .01 to .09 to
CHX Article XX, Rule 24 contain
additional guidance on the information
that participants would be required to
record and preserve. Among other
things, the interpretations establish the
scope of the proposed rule and specify
the exclusion from the proposed rule for
principal trading by a co-specialist,
market maker, or floor broker.13 In
addition, the interpretations note that
participants will not be required to
record information with respect to
orders sent or received through the
Exchange’s MAX system 14 or through
any other electronic systems that the
Exchange recognizes as providing the
required information in an acceptable
format, and further sets out limited
11 See
CHX Article XX, Proposed Rule 24(b).
CHX Article XX, Proposed Rule 24(c).
13 See CHX Article XX, Proposed Rule 24,
Interpretation and Policy .02; and Amendment No.
4, supra note 7 (Interpretation and Policy .02 states
that ‘‘Except for orders delivered orally or
telephonically to a specialist at the post, a decision
by a co-specialist, market maker or floor broker to
buy or sell securities for his or her own account on
the Floor of the Exchange shall not constitute an
order for which a record much be made under this
Rule.’’). The Exchange has represented that this
exception is designed to recognize that all necessary
information about a floor participant’s own trading
is already captured by the Exchange’s reporting
systems. See Notice, supra note 5, at note 11.
14 MAX is the Exchange’s electronic execution
system.
12 See
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exceptions to the data-recording
requirements.15
III. Discussion and Commission
Findings
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The Commission finds that the
proposed rule change, as amended, is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange.16 In particular, the
Commission believes that the proposal
is consistent with section 6(b)(5) of the
Act,17 which requires that the rules of
an exchange be 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.
The purpose of the Exchange’s
proposed rule change is to require the
Exchange’s floor participants to enter
order-related information into an
electronic data capture system to
facilitate automated surveillance of
market activity by the Exchange.18 For
example, CHX floor brokers have
traditionally accepted orders from a
variety of sources, some of which may
not involve the creation of an electronic
audit trail (e.g., orders taken over the
telephone). In these cases, only the
execution information would be
captured electronically, and thus be able
to be searched in an electronic form by
the Exchange’s market regulation
personnel. Non-execution information
relating to the original order (e.g., time
of order receipt) is available currently
only from the paper order ticket. By
requiring the electronic capture of this
information, the Exchange would be
able to use the data obtained from the
proposed rule change in surveillance
reports relating to, for example, best
execution, front-running surveillance,
15 See Proposed Interpretations and Policies .04
(regarding orders sent and received through certain
systems), .05 (regarding orders that the Exchange
expressly recognizes as incompatible for entry into
an Exchange system), .06 (regarding bona fide
arbitrage orders and orders to offset a transaction
made in error); and .07 (regarding cross orders that
are immediately executed). Proposed Interpretation
and Policy .09, however, reminds participants that
the provisions of proposed CHX Rule 24 do not
replace any record retention obligations to which a
participant may be subject under the Act.
16 In approving this proposed rule change, as
amended, the Commission notes that it has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
17 15 U.S.C. 78f(b)(5).
18 See Letter from David C. Whitcomb, Jr., Senior
Vice President and Chief Regulatory Officer, CHX,
to Sharon Lawson, Senior Special Counsel, Division
of Market Regulation, Commission, dated June 27,
2005.
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16:54 May 11, 2006
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order execution priority, manipulative
activity, and trade reporting.
Further, the Exchange’s proposed rule
change is intended to address
recommendations made in the
Exchange’s 2003 settlement agreement
with the Commission.19 In the
settlement agreement, the Commission
cited the Exchange’s failure, with
respect to its specialist firms, ‘‘to detect
and prevent a large number of trading
rule violations, in part, because [the
Exchange] did not have adequate
surveillance systems to detect possible
violations.’’ 20 In addition, the
Commission found that the CHX had
‘‘relied on ineffective and often flawed
manual processes to detect violations
* * *’’ 21 Pursuant to the settlement
agreement, the Exchange undertook to
engage a consultant to conduct a
comprehensive review of, among other
things, its trading floor surveillance to
ascertain whether its trading floor
surveillance is appropriately designed
and implemented to promote and
enforce compliance with the federal
securities laws and CHX and
Commission rules.
The Commission believes that the
Exchange’s proposed rule change, as
amended, to require Exchange
participants to enter order-related
information into an electronic data
capture system is consistent with the
Exchange’s settlement agreement with
the Commission. Specifically, the
Commission believes that the proposed
rule change, as amended, should allow
the Exchange to maintain a more
automated process for receiving a
comprehensive set of audit trail data on
its floor participants’ trading activity
and thereby allow the Exchange to
integrate more audit trail data into its
surveillance systems. Increased
automation with respect to the receipt of
order details should, in turn, allow the
Exchange to perform more automated
surveillance and generate better
surveillance reports. In addition, the
Commission believes that the proposal
will improve the Exchange’s ability to
review its participants’ order-handling
activities and to determine their
compliance with applicable trading
rules, including, for example, short sale
position marking and tick test
requirements,22 best execution,23 and
trading ahead prohibitions.24
19 See Securities Exchange Act Release No. 48566
(September 30, 2003) (Administrative Proceeding
File No. 3–11282), available at: https://www.sec.gov/
litigation/admin/34-48566.htm.
20 Id.
21 Id.
22 See 17 CFR 240.10a–1.
23 See, e.g., CHX Article XX, Rule 10.
24 See CHX Article XXX, Rules 2 and 3.
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Further, the Commission notes that
proposed Interpretation and Policy .05,
which would allow the Exchange to
identify specific types of orders that
might be exempt from the datarecording requirements when they are
incompatible for entry into Exchange
systems, is designed to cover only those
rare situations where, due to
unexpected consequences of unrelated
systems changes or a software failure,
CHX participants cannot enter data
about a particular type of order into the
Exchange’s systems for a limited period
of time. The Commission notes that this
exception is not intended to allow
participants to avoid the recording
requirements of the rule, and does not
relieve a participant from its
recordkeeping obligations under the
Exchange’s rules and applicable federal
securities laws. The Commission notes
that the Exchange has represented that
it would work with participants to
correct quickly any software or systems
problems that precipitated the system
incompatibility.25 Furthermore, the
Exchange will notify its participants
that the participants should notify
Exchange personnel when a system
incompatibility arises that is covered by
proposed Interpretation and Policy
.05.26
With respect to proposed
Interpretation and Policy .04, which
recognizes that participants are not
required to record information that is
already captured by the Exchange’s
systems or by other systems that the
Exchange expressly recognizes as
providing the required data in an
acceptable format, the Commission
notes that the Exchange has represented
that its MAX system already captures
all of the information required by the
proposed rule change.27 The
Commission also notes that the
Exchange has represented that it retains
records associated with its MAX
system for the applicable record
retention period.
With respect to proposed
Interpretation and Policy .07, which
permits a participant to record only
certain information for orders to buy
and sell the same security that are
executed in full immediately upon
receipt, the Commission notes that the
Exchange has represented that
Interpretation and Policy .07 to the
proposed rule change reflects the
Exchange’s belief that it will receive all
of the information necessary to conduct
surveillance with respect to orders to
buy and sell the same security that are
25 See
Notice, supra note 5, at note 14.
Amendment No. 4, supra note 7.
27 See Notice, supra note 5, at note 14.
26 See
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executed in full immediately upon
receipt through a combination of
Interpretation and Policy .07 and other
information captured within the
Exchange’s system.28 In particular, the
Commission notes that the Exchange’s
order management systems utilize an
account-based approach in which
principal transactions are entered
through a principal trading account that
is separate from the broker’s agency
account, and that the Exchange’s
surveillance reports are able to
distinguish between a broker’s principal
and agency trades.29 Further, the
Exchange has the ability to request
information from its clearing
participants in the event that the
Exchange requires information about the
customers involved in a certain
transaction where a customer did not
serve as the clearing participant to its
own order.30
Based on the above, the Commission
finds that the Exchange’s proposed rule
change is consistent with the
Exchange’s settlement agreement with
the Commission.31 Further, the
Commission finds that the Exchange’s
proposal to require the electronic
capture of audit trail data in order to
enhance surveillance for compliance
with CHX’s rules, the Act, and the rules
thereunder is consistent with the
requirements of Section 6(b)(5) of the
Act,32 which requires that the rules of
an exchange be designed to promote just
and equitable principles of trade, and,
in general, to protect investors and the
public interest. The Commission
believes that approving the proposal
will help to enhance and strengthen the
Exchange’s surveillance program by
providing the Exchange with the data
necessary to conduct more thorough and
efficient surveillance of its participants’
trading activities, and should thereby
promote just and equitable principles of
trade and further the protection of
investors and the public interest. The
Commission notes that the detailed
information required to be obtained will
not replace any record retention
obligations already required of CHX
participants under the Act and the rules
thereunder.
28 See
Amendment No. 4, supra note 7.
Letter from David C. Whitcomb, Jr., Senior
Vice President and Chief Regulatory Officer, CHX,
to Sharon Lawson, Senior Special Counsel, Division
of Market Regulation, Commission, dated April 26,
2006.
30 Telephone conversation between Ellen J. Neely,
President and General Counsel, CHX, and Richard
Holley III, Special Counsel, Division of Market
Regulation, Commission, on May 3, 2006.
31 See supra note 19.
32 15 U.S.C. 78f(b)(5).
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29 See
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Accelerated Approval of Amendment
Nos. 3 and 4
The Commission finds good cause for
approving Amendment Nos. 3 and 4 to
the proposed rule change prior to the
thirtieth day after the amendment is
published for comment in the Federal
Register pursuant to Section 19(b)(2) of
the Act.33 In Amendment No. 3, the
Exchange merely clarified that (1)
participants could develop their own
systems for collecting and recording
required data in a format acceptable to
the Exchange; (2) Brokerplex is
available to any participant; and (3) the
Exchange is implementing changes to
the Brokerplex system to incorporate
the requirements of this proposed rule
change. In Amendment No. 4, the
Exchange merely modified its proposed
rule change to accommodate an order
designation currently used by its floor
brokers that permits a floor broker to
attach a special designation to a cross
order when, on account of the
customer’s instructions and to the
extent permitted by the Exchange’s
rules, the cross order cannot be
immediately executed, as well as set
May 8, 2006 as the compliance date.34
In addition, the Exchange made, in part,
certain clarifications and
representations regarding the operation
and implementation of the proposed
rule, and the ability of the Exchange to
gather sufficient surveillance
information.
The Commission believes that
Amendment No. 3 appropriately reflects
that changes to the Brokerplex system
are being implemented in connection
with the proposed rule change. In
addition, the Commission believes that
Amendment No. 4 implements a
reasonable compliance date for the
proposed rule change, as amended,
since the Exchange has been holding
biweekly meetings with its participants
to educate them about the requirements
of the proposed rule change.
Furthermore, the Commission believes
that the other changes made to the
proposed rule change in Amendment
No. 4, as described above, merely
accommodate the functionality
currently employed by floor brokers,
acknowledge the ability of the Exchange
33 15
U.S.C. 78s(b)(2).
special designation would be attached to
the side of the market identifier. See proposed CHX
Article XX, Rule 24(b)(6). The floor broker would
be required to complete all other fields required by
proposed CHX Article XX, Rule 24. In addition, this
special designation does not alter a participant’s
obligations with respect to the execution of orders;
if a cross transaction can be immediately executed
in accordance with a customer’s instructions and
applicable rules, it should be immediately
executed. See Amendment No. 4, supra note 7.
34 The
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27761
to obtain surveillance information,
clarify that records must be kept
pursuant to the proposed rule for orders
delivered orally or telephonically to a
specialist at the post, and describe other
responsibilities of the Exchange under
the proposed rule change, as amended.
Accordingly, the Commission believes
that good cause exists, consistent with
Section 19(b) and Section 6(b)(5) of the
Act, to accelerate approval of
Amendment Nos. 3 and 4 in order to
allow the Exchange to implement the
proposal immediately.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether Amendment Nos. 3
and 4 to the proposed rule change 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–2004–38 on the
subject line.
Paper Comments
• 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–2004–38. 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 also will be
available for inspection and copying at
the principal office of the Exchange. All
comments received will be posted
without change; the Commission does
not edit personal identifying
E:\FR\FM\12MYN1.SGM
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27762
Federal Register / Vol. 71, No. 92 / Friday, May 12, 2006 / Notices
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–CHX–2004–38 and should
be submitted on or before June 2, 2006.
V. Conclusion
For the foregoing reasons, the
Commission finds that the proposed
rule change, as amended, is consistent
with the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,35 that the
proposed rule change (SR–CHX–2004–
38) and Amendment Nos. 1 and 2
thereto are approved, and that
Amendment Nos. 3 and 4 thereto are
approved on an accelerated basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.36
Nancy M. Morris,
Secretary.
[FR Doc. E6–7257 Filed 5–11–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–53770; File No. SR–NASD–
2006–030]
Self-Regulatory Organizations;
National Association of Securities
Dealers, Inc.; Notice of Filing of
Proposed Rule Change and
Amendment No. 1 Thereto To Establish
an Annual Administrative Fee for
Market Data Distributors That Are
Recipients of Nasdaq Proprietary Data
Products
sroberts on PROD1PC70 with NOTICES
May 8, 2006.
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 February
27, 2006, the National Association of
Securities Dealers, Inc. (‘‘NASD’’),
through its subsidiary, The Nasdaq
Stock Market, Inc. (‘‘Nasdaq’’), 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 Nasdaq. Nasdaq
filed Amendment No. 1 to the proposed
rule change on April 17, 2006. The
Commission is publishing this notice to
solicit comments on the proposed rule
35 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.
36 17
VerDate Aug<31>2005
16:54 May 11, 2006
Jkt 208001
change, as amended, from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Nasdaq proposes to establish an
annual administrative fee for market
data distributors that are recipients of
Nasdaq proprietary data products. The
text of the proposed rule change is
below. Proposed new language is in
italics.3
7010 System Services
(a)–(w) No change.
(x) Nasdaq Annual Administrative Fee
The Nasdaq Annual Administrative
Fee shall be assessed to market data
distributors that receive any proprietary
Nasdaq data feed product. Each such
distributor shall, on an annual basis, be
assessed the higher of the applicable
Nasdaq Annual Administrative Fees:
Delayed Nasdaq distributor—$500.
Real-Time Nasdaq distributor
(includes delayed fee, if applicable)—
$1,000.
The Association may waive the
foregoing fee for colleges and
universities for devices used by students
and professors in performing university
or college research or classroom-related
activities.
*
*
*
*
*
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
Nasdaq included statements concerning
the purpose of and basis for the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below.
Nasdaq 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
As market data administration
becomes more automated, Nasdaq has
strived to ensure that its systems lead
the industry in ease of use and
3 Changes are marked to the rule text that appears
in the electronic NASD Manual found at
www.nasd.com. No pending rule filings would
affect the text of this rule. Because of the nature of
this rule, no conforming change will be made to the
rules of The NASDAQ Stock Market LLC. See
Securities Exchange Act Release No. 53128 (January
13, 2006), 71 FR 3550 (January 23, 2006).
PO 00000
Frm 00102
Fmt 4703
Sfmt 4703
effectiveness. In the past few years,
Nasdaq has implemented a multitude of
systems to improve vendor
communication. This trend is likely to
continue, as market data distributors
demand greater automation of the
process to subscribe to market data
feeds, increased electronic access to
information regarding their market data
usage, and shorter processing times to
approve requests for changes in service.
To further Nasdaq’s proactive
approach to improving market data
administration, Nasdaq proposes to
introduce an annual administrative fee
for all distributors receiving proprietary
Nasdaq data feed products. This fee will
allow Nasdaq to recover the ongoing
fixed market data administrative costs,
such as the costs of establishing and
maintaining new market data
distributors, as well as the costs to
maintain and improve the
administrative tools distributors utilize
to subscribe to and monitor their data
products usage.
Currently, Nasdaq market data
distributors are not assessed an annual
administrative fee for the use of
proprietary Nasdaq data feed products.4
The amount of the new fee, which will
be assessed on an annual basis, will
vary based on whether a distributor uses
Nasdaq data on a delayed or a real-time
basis. A distributor that only receives
delayed data will pay the Delayed
Nasdaq Annual Administrative Fee of
$500; a distributor that receives realtime data will pay the Real-Time
Nasdaq Annual Administrative Fee of
$1,000, and a distributor that receives
both real-time and delayed data feeds
will pay the Real-Time Nasdaq Annual
Administrative Fee of $1,000.
Consistent with the current practice of
the American Stock Exchange,5 Nasdaq
is proposing that accredited colleges
and universities that can establish that
they are using proprietary data for
research and classroom-related activities
may receive a waiver of the
administrative fee. This fee waiver
recognizes the high value that Nasdaq
places on research and educational
instruction at the university level. To be
considered for an academic waiver, the
university’s program sponsor should
submit to Nasdaq a written request
stating the name and description of the
academic program, the company and
contact name of the external distributor
to provide the data, the number of
devices with access to real-time data, an
4 Distributors pay an annual administrative fee
regarding their usage of UTP data feed products.
See NASD Rule 7010(l)(1).
5 See Amex Academic Waiver Policy at
www.amex.com/amextrader.
E:\FR\FM\12MYN1.SGM
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]]>Agencies
[Federal Register Volume 71, Number 92 (Friday, May 12, 2006)]
[Notices]
[Pages 27758-27762]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-7257]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53772; File No. SR-CHX-2004-38]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Order Granting Approval To Proposed Rule Change and Amendment Nos. 1
and 2 Thereto and Notice of Filing and Order Granting Accelerated
Approval to Amendment Nos. 3 and 4 Thereto Relating to Records of
Orders and Executions
May 8, 2006.
I. Introduction
On November 3, 2004, the Chicago Stock Exchange, Inc. (``CHX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend CHX Article XX, Rule 24 to require on-
floor participants to electronically record specific details about
orders originating on or off the floor of the Exchange for execution on
the Exchange, as well as orders issued from the floor of the Exchange
to any other market or trading venue. On July 3, 2005 and September 8,
2005, the
[[Page 27759]]
Exchange filed Amendment Nos. 1 \3\ and 2 \4\ to the proposed rule
change, respectively. The proposed rule change, as amended by Amendment
Nos. 1 and 2, was published for comment in the Federal Register on
November 18, 2005.\5\ The Commission received no comments on the
proposal, as amended by Amendment Nos. 1 and 2. On December 13, 2005,
the CHX filed Amendment No. 3 to the proposed rule change.\6\ On May 3,
2006, the CHX filed Amendment No. 4 to the proposed rule change.\7\
This order approves the proposed rule change, as amended by Amendment
Nos. 1 and 2; grants accelerated approval to Amendment Nos. 3 and 4 to
the proposed rule change; and solicits comments from interested persons
on Amendment Nos. 3 and 4.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Amendment No. 1 dated July 3, 2005.
\4\ See Amendment No. 2 dated September 8, 2005.
\5\ See Securities Exchange Act Release No. 52766 (November 10,
2005), 70 FR 70002 (``Notice'').
\6\ See Amendment No. 3 dated December 12, 2005. Amendment No. 3
clarified that while the Exchange's systems are the only systems
currently recognized by the Exchange for the collection and
recording of the required information, Exchange participants
ultimately could develop their own systems for collecting and
recording that information so long as the systems provide the data
in a format acceptable to the Exchange; the Brokerplex[supreg]
system is available to all floor participants who request the system
and pay any applicable fees; and the Exchange is making changes to
its existing Brokerplex[supreg] system to permit this proposal to be
implemented. Brokerplex[supreg] is the Exchange's floor broker order
management system that can be used by CHX floor brokers to manage
their orders, route orders to the Exchange's co-specialists for
execution, and report executed trades. It is not an order execution
system, although it can send orders to the CHX's MAX[supreg] system.
See infra note 15 (describing the MAX[supreg] system). The
Commission notes that the Exchange does not currently impose a
separate fee for use of the Brokerplex[supreg] system, and to the
extent that the Exchange ever contemplates imposing such a fee it
would need to file a rule change with the Commission under Section
19(b) of the Act and Rule 19(b)(4) thereunder.
\7\ See Amendment No. 4 dated May 3, 2006. In addition to
clarifying changes to the rule text, Amendment No. 4 adds
Interpretation and Policy .10 to the proposed rule to specify a
compliance date of May 8, 2006 by which the Exchange's on-floor
participants must comply with the rule. In addition, Amendment No. 4
confirms that the Exchange's systems will permit a floor broker,
when identifying the side of the market on which an order is
received, to attach a special designation to a cross order (which
will be attached to the side of the market designation in field
(b)(6)) when, on account of the customer's instructions and to the
extent permitted by the Exchange's rules, that order cannot be
immediately executed. Amendment No. 4 also clarifies Interpretation
and Policy .02 to specify that records must be kept pursuant to the
proposed rule change for orders delivered orally or telephonically
to a specialist at the post. Finally, in Amendment No. 4, the
Exchange represented that (1) it will notify its participants that
they should notify the Exchange if they believe that an Exchange
system does not permit them to enter all of the information required
by the proposed rule, as permitted by Interpretation and Policy .05;
(2) it will consider further changes to CHX Rule 24 in response to
changes to Commission or Exchange rules; and (3) it believes that
with respect to immediately executed orders, it receives all of the
information necessary to conduct surveillance through the
information required under Interpretation and Policy .07 and other
Exchange systems.
---------------------------------------------------------------------------
II. Description of the Proposal
Under the proposed rule change, the Exchange proposes to require
its floor participants to provide particular data about all orders
originating on or off the floor of the Exchange for execution on the
Exchange, as well as all orders issued from the floor of the Exchange
to any other market or trading venue.\8\ Specifically, the Exchange
proposes to require floor participants to record, in electronic systems
designated by the Exchange, the following details about each covered
order: (1) The symbol of the security; (2) the clearing participant;
(3) an order identifier that uniquely identifies the order; \9\ (4) the
identity of the participant recording the order details; (5) the number
of shares or quantity of the security; (6) the side of the market; (7)
a designation of the order type (e.g., market, limit, stop, stop
limit); (8) whether the order is agency or professional; \10\ (9)
whether the order is being handled pursuant to Section 11(a)(1)(G) of
the Act and any applicable rules thereunder; (10) whether the order is
short or short exempt; (11) whether the order is a bona fide arbitrage
order; (12) any limit price and/or stop price; (13) the date and time
of order receipt or transmission (as applicable); (14) the market, off-
floor firm, or on-floor participant to which the order was transmitted
or from which the order was received (if applicable); (15) the order's
time in force; (16) designation as held or not held; (17) any special
conditions or instructions (e.g., any customer display or do-not-
display instructions or any all-or-none conditions); (18) any
modifications that are made to the details set out in (1) through (17)
above or (20) below, for all or part of the order, or any cancellation
of all or part of the order; (19) the date and time of receipt or
transmission of any modifications to, or cancellation of, the order;
(20) the date and time of any order expiration; (21) the identity of
the party cancelling or modifying the order; (22) the transaction
price, if applicable; (23) the number of shares executed, if
applicable; (24) the date and time of execution, if applicable; (25)
the contra party to the execution (if applicable); (26) the settlement
instructions associated with the order, if applicable; (27) system-
generated time(s) of recording required information; and (28) any other
information that may be required by the Exchange from time to time.\11\
Floor participants would be required to record this information
immediately after that information is received or becomes
available.\12\
---------------------------------------------------------------------------
\8\ The Exchange represents that this proposal is consistent
with recommendations made by the independent consultant retained by
the Exchange under its recent settlement agreement with the
Commission. See Securities Exchange Act Release No. 48566 (September
30, 2003), Administrative Proceeding File No. 3-11282. See also
Notice, supra note 5, at note 13.
The Commission notes that the Exchange recently amended CHX
Article V, Rule 4 to prohibit Exchange participants from using any
communications means to send orders to another market for execution
(``layoff service''), unless that layoff service has established a
process for providing the Exchange with specific information about
the orders and the executions that participants receive. See
Securities Exchange Act Release No. 52534 (September 29, 2005), 70
FR 58500 (October 6, 2005) (SR-CHX-2004-25). In addition, the
Exchange has represented that the Exchange's staff will present to
the Exchange's Board of Directors a separate rule that confirms the
record-keeping obligations of its off-floor participants. See
Notice, supra note 5, at note 16.
\9\ This order identifier does not change when modifications are
made to the order, or when it is cancelled, allowing any changes to
be tracked back to the original order.
\10\ The Exchange's rules define a ``professional'' order as one
that is for the account of a broker-dealer, the account of an
associated person of a broker-dealer, or any account in which a
broker-dealer or an associated person of a broker-dealer has any
direct or indirect interest. See CHX Article XXX, Rule 2,
Interpretation and Policy .04.
\11\ See CHX Article XX, Proposed Rule 24(b).
\12\ See CHX Article XX, Proposed Rule 24(c).
---------------------------------------------------------------------------
In addition, proposed new Interpretations and Policies .01 to .09
to CHX Article XX, Rule 24 contain additional guidance on the
information that participants would be required to record and preserve.
Among other things, the interpretations establish the scope of the
proposed rule and specify the exclusion from the proposed rule for
principal trading by a co-specialist, market maker, or floor
broker.\13\ In addition, the interpretations note that participants
will not be required to record information with respect to orders sent
or received through the Exchange's MAX[supreg] system \14\ or through
any other electronic systems that the Exchange recognizes as providing
the required information in an acceptable format, and further sets out
limited
[[Page 27760]]
exceptions to the data-recording requirements.\15\
---------------------------------------------------------------------------
\13\ See CHX Article XX, Proposed Rule 24, Interpretation and
Policy .02; and Amendment No. 4, supra note 7 (Interpretation and
Policy .02 states that ``Except for orders delivered orally or
telephonically to a specialist at the post, a decision by a co-
specialist, market maker or floor broker to buy or sell securities
for his or her own account on the Floor of the Exchange shall not
constitute an order for which a record much be made under this
Rule.''). The Exchange has represented that this exception is
designed to recognize that all necessary information about a floor
participant's own trading is already captured by the Exchange's
reporting systems. See Notice, supra note 5, at note 11.
\14\ MAX[supreg] is the Exchange's electronic execution system.
\15\ See Proposed Interpretations and Policies .04 (regarding
orders sent and received through certain systems), .05 (regarding
orders that the Exchange expressly recognizes as incompatible for
entry into an Exchange system), .06 (regarding bona fide arbitrage
orders and orders to offset a transaction made in error); and .07
(regarding cross orders that are immediately executed). Proposed
Interpretation and Policy .09, however, reminds participants that
the provisions of proposed CHX Rule 24 do not replace any record
retention obligations to which a participant may be subject under
the Act.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
The Commission finds that the proposed rule change, as amended, is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\16\ In particular, the Commission believes that the proposal
is consistent with section 6(b)(5) of the Act,\17\ which requires that
the rules of an exchange be 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.
---------------------------------------------------------------------------
\16\ In approving this proposed rule change, as amended, the
Commission notes that it has considered the proposed rule's impact
on efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The purpose of the Exchange's proposed rule change is to require
the Exchange's floor participants to enter order-related information
into an electronic data capture system to facilitate automated
surveillance of market activity by the Exchange.\18\ For example, CHX
floor brokers have traditionally accepted orders from a variety of
sources, some of which may not involve the creation of an electronic
audit trail (e.g., orders taken over the telephone). In these cases,
only the execution information would be captured electronically, and
thus be able to be searched in an electronic form by the Exchange's
market regulation personnel. Non-execution information relating to the
original order (e.g., time of order receipt) is available currently
only from the paper order ticket. By requiring the electronic capture
of this information, the Exchange would be able to use the data
obtained from the proposed rule change in surveillance reports relating
to, for example, best execution, front-running surveillance, order
execution priority, manipulative activity, and trade reporting.
---------------------------------------------------------------------------
\18\ See Letter from David C. Whitcomb, Jr., Senior Vice
President and Chief Regulatory Officer, CHX, to Sharon Lawson,
Senior Special Counsel, Division of Market Regulation, Commission,
dated June 27, 2005.
---------------------------------------------------------------------------
Further, the Exchange's proposed rule change is intended to address
recommendations made in the Exchange's 2003 settlement agreement with
the Commission.\19\ In the settlement agreement, the Commission cited
the Exchange's failure, with respect to its specialist firms, ``to
detect and prevent a large number of trading rule violations, in part,
because [the Exchange] did not have adequate surveillance systems to
detect possible violations.'' \20\ In addition, the Commission found
that the CHX had ``relied on ineffective and often flawed manual
processes to detect violations * * *'' \21\ Pursuant to the settlement
agreement, the Exchange undertook to engage a consultant to conduct a
comprehensive review of, among other things, its trading floor
surveillance to ascertain whether its trading floor surveillance is
appropriately designed and implemented to promote and enforce
compliance with the federal securities laws and CHX and Commission
rules.
---------------------------------------------------------------------------
\19\ See Securities Exchange Act Release No. 48566 (September
30, 2003) (Administrative Proceeding File No. 3-11282), available
at: https://www.sec.gov/litigation/admin/34-48566.htm.
\20\ Id.
\21\ Id.
---------------------------------------------------------------------------
The Commission believes that the Exchange's proposed rule change,
as amended, to require Exchange participants to enter order-related
information into an electronic data capture system is consistent with
the Exchange's settlement agreement with the Commission. Specifically,
the Commission believes that the proposed rule change, as amended,
should allow the Exchange to maintain a more automated process for
receiving a comprehensive set of audit trail data on its floor
participants' trading activity and thereby allow the Exchange to
integrate more audit trail data into its surveillance systems.
Increased automation with respect to the receipt of order details
should, in turn, allow the Exchange to perform more automated
surveillance and generate better surveillance reports. In addition, the
Commission believes that the proposal will improve the Exchange's
ability to review its participants' order-handling activities and to
determine their compliance with applicable trading rules, including,
for example, short sale position marking and tick test
requirements,\22\ best execution,\23\ and trading ahead
prohibitions.\24\
---------------------------------------------------------------------------
\22\ See 17 CFR 240.10a-1.
\23\ See, e.g., CHX Article XX, Rule 10.
\24\ See CHX Article XXX, Rules 2 and 3.
---------------------------------------------------------------------------
Further, the Commission notes that proposed Interpretation and
Policy .05, which would allow the Exchange to identify specific types
of orders that might be exempt from the data-recording requirements
when they are incompatible for entry into Exchange systems, is designed
to cover only those rare situations where, due to unexpected
consequences of unrelated systems changes or a software failure, CHX
participants cannot enter data about a particular type of order into
the Exchange's systems for a limited period of time. The Commission
notes that this exception is not intended to allow participants to
avoid the recording requirements of the rule, and does not relieve a
participant from its recordkeeping obligations under the Exchange's
rules and applicable federal securities laws. The Commission notes that
the Exchange has represented that it would work with participants to
correct quickly any software or systems problems that precipitated the
system incompatibility.\25\ Furthermore, the Exchange will notify its
participants that the participants should notify Exchange personnel
when a system incompatibility arises that is covered by proposed
Interpretation and Policy .05.\26\
---------------------------------------------------------------------------
\25\ See Notice, supra note 5, at note 14.
\26\ See Amendment No. 4, supra note 7.
---------------------------------------------------------------------------
With respect to proposed Interpretation and Policy .04, which
recognizes that participants are not required to record information
that is already captured by the Exchange's systems or by other systems
that the Exchange expressly recognizes as providing the required data
in an acceptable format, the Commission notes that the Exchange has
represented that its MAX[supreg] system already captures all of the
information required by the proposed rule change.\27\ The Commission
also notes that the Exchange has represented that it retains records
associated with its MAX[supreg] system for the applicable record
retention period.
---------------------------------------------------------------------------
\27\ See Notice, supra note 5, at note 14.
---------------------------------------------------------------------------
With respect to proposed Interpretation and Policy .07, which
permits a participant to record only certain information for orders to
buy and sell the same security that are executed in full immediately
upon receipt, the Commission notes that the Exchange has represented
that Interpretation and Policy .07 to the proposed rule change reflects
the Exchange's belief that it will receive all of the information
necessary to conduct surveillance with respect to orders to buy and
sell the same security that are
[[Page 27761]]
executed in full immediately upon receipt through a combination of
Interpretation and Policy .07 and other information captured within the
Exchange's system.\28\ In particular, the Commission notes that the
Exchange's order management systems utilize an account-based approach
in which principal transactions are entered through a principal trading
account that is separate from the broker's agency account, and that the
Exchange's surveillance reports are able to distinguish between a
broker's principal and agency trades.\29\ Further, the Exchange has the
ability to request information from its clearing participants in the
event that the Exchange requires information about the customers
involved in a certain transaction where a customer did not serve as the
clearing participant to its own order.\30\
---------------------------------------------------------------------------
\28\ See Amendment No. 4, supra note 7.
\29\ See Letter from David C. Whitcomb, Jr., Senior Vice
President and Chief Regulatory Officer, CHX, to Sharon Lawson,
Senior Special Counsel, Division of Market Regulation, Commission,
dated April 26, 2006.
\30\ Telephone conversation between Ellen J. Neely, President
and General Counsel, CHX, and Richard Holley III, Special Counsel,
Division of Market Regulation, Commission, on May 3, 2006.
---------------------------------------------------------------------------
Based on the above, the Commission finds that the Exchange's
proposed rule change is consistent with the Exchange's settlement
agreement with the Commission.\31\ Further, the Commission finds that
the Exchange's proposal to require the electronic capture of audit
trail data in order to enhance surveillance for compliance with CHX's
rules, the Act, and the rules thereunder is consistent with the
requirements of Section 6(b)(5) of the Act,\32\ which requires that the
rules of an exchange be designed to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. The Commission believes that approving the proposal
will help to enhance and strengthen the Exchange's surveillance program
by providing the Exchange with the data necessary to conduct more
thorough and efficient surveillance of its participants' trading
activities, and should thereby promote just and equitable principles of
trade and further the protection of investors and the public interest.
The Commission notes that the detailed information required to be
obtained will not replace any record retention obligations already
required of CHX participants under the Act and the rules thereunder.
---------------------------------------------------------------------------
\31\ See supra note 19.
\32\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Accelerated Approval of Amendment Nos. 3 and 4
The Commission finds good cause for approving Amendment Nos. 3 and
4 to the proposed rule change prior to the thirtieth day after the
amendment is published for comment in the Federal Register pursuant to
Section 19(b)(2) of the Act.\33\ In Amendment No. 3, the Exchange
merely clarified that (1) participants could develop their own systems
for collecting and recording required data in a format acceptable to
the Exchange; (2) Brokerplex[supreg] is available to any participant;
and (3) the Exchange is implementing changes to the Brokerplex[supreg]
system to incorporate the requirements of this proposed rule change. In
Amendment No. 4, the Exchange merely modified its proposed rule change
to accommodate an order designation currently used by its floor brokers
that permits a floor broker to attach a special designation to a cross
order when, on account of the customer's instructions and to the extent
permitted by the Exchange's rules, the cross order cannot be
immediately executed, as well as set May 8, 2006 as the compliance
date.\34\ In addition, the Exchange made, in part, certain
clarifications and representations regarding the operation and
implementation of the proposed rule, and the ability of the Exchange to
gather sufficient surveillance information.
---------------------------------------------------------------------------
\33\ 15 U.S.C. 78s(b)(2).
\34\ The special designation would be attached to the side of
the market identifier. See proposed CHX Article XX, Rule 24(b)(6).
The floor broker would be required to complete all other fields
required by proposed CHX Article XX, Rule 24. In addition, this
special designation does not alter a participant's obligations with
respect to the execution of orders; if a cross transaction can be
immediately executed in accordance with a customer's instructions
and applicable rules, it should be immediately executed. See
Amendment No. 4, supra note 7.
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The Commission believes that Amendment No. 3 appropriately reflects
that changes to the Brokerplex[supreg] system are being implemented in
connection with the proposed rule change. In addition, the Commission
believes that Amendment No. 4 implements a reasonable compliance date
for the proposed rule change, as amended, since the Exchange has been
holding biweekly meetings with its participants to educate them about
the requirements of the proposed rule change. Furthermore, the
Commission believes that the other changes made to the proposed rule
change in Amendment No. 4, as described above, merely accommodate the
functionality currently employed by floor brokers, acknowledge the
ability of the Exchange to obtain surveillance information, clarify
that records must be kept pursuant to the proposed rule for orders
delivered orally or telephonically to a specialist at the post, and
describe other responsibilities of the Exchange under the proposed rule
change, as amended. Accordingly, the Commission believes that good
cause exists, consistent with Section 19(b) and Section 6(b)(5) of the
Act, to accelerate approval of Amendment Nos. 3 and 4 in order to allow
the Exchange to implement the proposal immediately.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment Nos. 3
and 4 to the proposed rule change 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-2004-38 on the subject line.
Paper Comments
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-2004-38. 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 also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
[[Page 27762]]
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-CHX-2004-38 and should be submitted on or before June 2,
2006.
V. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change, as amended, is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to a national
securities exchange.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\35\ that the proposed rule change (SR-CHX-2004-38) and Amendment
Nos. 1 and 2 thereto are approved, and that Amendment Nos. 3 and 4
thereto are approved on an accelerated basis.
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\35\ 15 U.S.C. 78s(b)(2).
\36\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\36\
Nancy M. Morris,
Secretary.
[FR Doc. E6-7257 Filed 5-11-06; 8:45 am]
BILLING CODE 8010-01-P
