Self-Regulatory Organizations; Chicago Stock Exchange, Inc,; Notice of Filing of a Proposed Rule Change and Amendment No. 1 Thereto to Implement a New Trading Model, 47836-47850 [E6-13618]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 71, Number 160 (Friday, August 18, 2006)]
[Notices]
[Pages 47836-47850]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-13618]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54301; File No. SR-CHX-2006-05]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc,; 
Notice of Filing of a Proposed Rule Change and Amendment No. 1 Thereto 
to Implement a New Trading Model

August 10, 2006.
    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 February 2, 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 CHX. On August 10, 
2006, the Exchange filed Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaces and supersedes the original filing 
in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CHX proposes to amend its rules to implement a new trading 
model that provides the opportunity for entirely automated executions 
to occur within a central matching system accessible by all Exchange 
participants. The new model also would end the Exchange's operation of 
a physical trading floor and is intended to comply with the 
requirements of Regulation NMS (``Reg. NMS'').\4\ The text of this 
proposed rule change is available on the Exchange's Web site at https://
www.chx.com/rules/proposed_rules.htm, in the Commission's Public 
Reference Room, and on the Commission's Web site at https://www.sec.gov.
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    \4\ 17 CFR 242.600, et seq.
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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 on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The CHX has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Through this proposed rule change, the Exchange seeks to implement 
a new trading model that allows its participants to interact in a 
fully-automated matching system. In this model, the Exchange would no 
longer operate a physical trading floor where on-floor specialists, 
brokers and market makers seek execution of their orders. Instead, the 
Exchange would operate an automated system where its participants--from 
any location--could submit orders for immediate execution. The Exchange 
believes that this new model provides an opportunity for its 
participants and their customers to receive efficient, low-cost 
executions, while giving the Exchange enhanced capabilities for 
surveilling its participants' trading activities.
    In this new model, the Exchange anticipates that most of its 
participants would continue to be ``off-Exchange'' order-sending firms 
that would simply send orders to the Matching System for execution. 
These firms would not be required to register with the Exchange to act 
in any specific capacity other than as trading participants.\5\ The 
Exchange would, however, allow participant firms to register in two 
special categories--to operate as proprietary market makers on the 
Exchange or to act as institutional brokers. Market makers could choose 
to post two-sided quotations and trade for their proprietary accounts. 
Any customer order would be accepted off the Exchange and a market 
maker could then choose whether or not to enter the order in the 
Exchange's Matching System or submit the order to a different venue. In 
contrast, any customer orders accepted by institutional brokers would 
be deemed to be on the Exchange when accepted. These market makers and 
institutional brokers would operate on the Exchange, even if they are 
not physically located on a single trading floor.
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    \5\ Since its demutualization in February 2005, the Exchange has 
not had ``members.'' Instead, a broker-dealer that seeks to effect 
transactions directly on the Exchange must become an Exchange 
``participant.''
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    Because the Exchange is taking this opportunity to modernize many 
of its long-standing procedures and rules, the implementation of the 
new trading model will result in changes to virtually

[[Page 47837]]

every section of the Exchange's rule book. The most significant changes 
can be found in new CHX Article 20 of the Exchange's rules, which 
describes the operation of the Exchange's central matching system. CHX 
Article 16 details the new role of market makers on the Exchange, and 
CHX Article 17 describes the role and responsibilities of the 
Exchange's institutional brokers. Changes to other sections of the 
rules are designed to eliminate obsolete provisions--including those 
that relate to the operation of a physical trading floor--and to update 
other responsibilities to reflect the more automated trading that is 
the hallmark of the Exchange's new model. The Exchange has also made an 
effort to better organize the rules. After describing the provisions of 
new CHX Articles 20, 16 and 17, this submission will review each of the 
other sets of proposed rule changes beginning with CHX Article 1.\6\
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    \6\ Throughout its rule book, the Exchange is replacing the 
Roman numerals currently used to identify each of its articles with 
an easier-to-understand Arabic number.
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a. The Matching System

    The Exchange's Matching System would be the core facility of the 
Exchange. It would provide the only means for the display of orders and 
a central point for the execution of orders. On one hand, the Matching 
System is simply an extension of the operation of the Exchange's 
electronic book to all securities traded on the Exchange.\7\ On the 
other hand, this Matching System would provide a much more robust 
platform for the interaction of orders than is possible on the Exchange 
today.
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    \7\ See Securities Exchange Act Release No. 52094 (July 21, 
2005), 70 FR 43913 (July 29, 2005) (approving the electronic book 
for the trading of securities not assigned to a specialist firm).
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    1. Trading hours. The Matching System would operate a regular 
trading session and a late trading session each day.\8\ The regular 
trading session ordinarily would begin immediately after the primary 
market for a security opens its market and would end at 3 p.m. each day 
for all securities except specified exchange-traded funds, which would 
trade until 3:15 p.m.\9\ The second trading session--the late trading 
session--would begin immediately after the close of the first session 
and would end at 3:30 p.m.\10\ Two senior officers of the Exchange 
could decide to open the Exchange for trading if the primary market 
announces that it will not open or will open later than usual, or if 
the primary market has not opened within 15 minutes after its normal 
operating time.\11\ Special rules apply to the trading hours for 
securities listed exclusively on the Exchange.\12\
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    \8\ See CHX Article 20, Rule 1(b).
    \9\ All times referenced in this filing are expressed in Central 
Time.
    \10\ These sessions are similar to the trading sessions that 
occur on the Exchange today, except that the late trading session in 
the new model (unlike the extended session under the current rules, 
in which the MAX system is not operational) would be a fully 
automated trading session. See CHX Article IX, Rule 10(b).
    \11\ See CHX Article 20, Rule 1, Interpretation and Policy .03. 
If these officers decide to open one or more NYSE-listed, Amex-
listed or other listed securities (other than Nasdaq-listed 
securities) when the primary market for these securities is not 
trading, the Matching System will cancel all pending opening cross 
orders in affected securities and, at the opening time selected by 
these officers, will then accept all other orders and match them as 
provided by the Matching System rules. If these officers decide to 
open one or more Nasdaq-listed securities when the primary market 
for these securities is not trading, the Matching System will: (a) 
If the decision is made before 8:30 a.m., execute all opening cross 
orders in affected securities as if the primary market had opened 
and then accept all other orders and match them as provided by the 
Matching System rules; or (b) if the decision is made on or after 
8:30 a.m., cancel all pending opening cross orders in affected 
securities and, at the opening time selected by the Exchange 
officers, then accept all other orders and match them as provided by 
the Matching System rules.
    \12\ See CHX Article 20, Rule 1, Interpretation and Policy .04 
(confirming that the regular trading session for these securities 
would begin at 8:30 a.m. and end at 3:00 p.m.).
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    2. Access to the Matching System. Exchange participants could route 
orders to the Matching System through any communications line approved 
by the Exchange.\13\ To the extent that the Exchange participates in 
the Intermarket Trading System (``ITS'') Plan or any other linkage 
plan, ITS commitments and other intermarket orders could be sent to the 
Matching System through those linkages.\14\
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    \13\ See CHX Article 20, Rule 8(a)(1).
    \14\ See CHX Article 20, Rule 8(a)(2). So long as it is required 
by the OTC/UTP Plan, the Exchange would also provide telephonic 
access to NASD market makers. See CHX Article 20, Rule 8(a)(3).
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    3. Eligible orders--basic requirements. The Exchange's Matching 
System would only accept day orders; orders designated good-till-
canceled would not be accepted.\15\ Similarly, except for immediate-or-
cancel market orders or specially-designated cross orders, the Matching 
System would only accept limit orders and orders for regular-way 
settlement.\16\ Orders could be submitted as round lots, odd lots or 
mixed lots, except that orders in securities that only trade in 
specific share size increments must be submitted only in those share 
sizes.\17\
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    \15\ See CHX Article 20, Rule 4(a)(2).
    \16\ See CHX Article 20, Rules 4(a)(1), 4(a)(3) and 4(a)(7). A 
special type of order--a non-regular way cross order--could be 
submitted for execution and non-regular way settlement. See CHX 
Article 20, Rule 4(b)(15).
    \17\ See CHX Article 20, Rule 4(a)(4).
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    Except for any types of cross and cross with size orders (described 
later in this filing), the Matching System would only accept orders 
that comply with the sub-penny requirements of Reg. NMS set out in Rule 
612 \18\ and that do not exceed any size and/or price limitations 
imposed by the Exchange to help eliminate erroneous transactions or 
orders and transactions that cannot be processed by the Exchange's 
systems.\19\ Because cross and cross with size orders essentially are 
sub-penny executions (rather than orders), these transactions could be 
submitted to the Matching System in sub-penny increments down to 
$0.000001.\20\ Importantly, however, the Matching System would not 
allow any type of cross or cross with size order (except a midpoint 
cross, a cross that executes at the midpoint of the NBBO or a cross 
with size) (i) Priced at or above $1.00, to execute at a price less 
than $.01 better than any order on the same side of the Matching 
System, or (ii) priced under $1.00, to execute at a price less than 
$.0001 better than any order on the same side of the Matching 
System.\21\
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    \18\ 17 CFR 242.612.
    \19\ See CHX Article 20, Rule 4(a)(6). The Exchange intends to 
develop a set of parameters that would be used to identify orders 
that either appear to be erroneous (based on their relationship to 
current market conditions) or that exceed the Exchange's systems 
capabilities (such as orders priced higher than a very high dollar 
level or those for a very large number of shares). These orders 
would be rejected to permit the continued effective operation of the 
Matching System.
    \20\ See CHX Article 20, Rule 4(a)(7)(b), confirming that cross 
and cross with size orders can be submitted in sub-penny increments, 
whether the orders are priced less than or at or above $1.00. The 
Exchange represents that it understands that it will need to obtain 
exemptive relief from the requirements of Reg. NMS to permit these 
executions to occur and will work with Commission staff to obtain 
that relief.
    \21\ See CHX Article 20, Rule 4(a)(7)(b). The Exchange 
represents that it has imposed this requirement based on input from 
Commission staff that it is required for any market operated by a 
national securities exchange.
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    4. Order types and conditions. The Matching System would accept a 
wide variety of order types and conditions, which are set out in CHX 
Article 20, Rule 4(b). Some of the more routine order types would 
include immediate or cancel (``IOC'') limit and market orders, fill or 
kill (``FOK'') orders, sell short and short exempt orders, reserve size 
orders, time in force orders and cancel on halt orders.\22\ As required 
by Reg. NMS, IOC

[[Page 47838]]

orders would be executed against any orders at or better than the 
Exchange's best bid or offer (``BBO''), including any reserve size or 
other undisplayed orders at or better than that price.\23\ Reserve size 
orders would permit a participant to identify a portion of an order to 
be displayed and a portion that should remain undisplayed, and to 
provide an instruction that the displayed portion should be refreshed 
to the original display quantity whenever the displayed share size 
falls below a specific threshold.\24\ Time in force orders would be 
eligible for execution within a specified time period, with any 
unexecuted balance to be immediately cancelled when this period 
expires.\25\ Cancel on halt orders would be automatically cancelled by 
the Matching System if a trading halt or suspension is declared on the 
Exchange in that security.\26\
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    \22\ See CHX Article 20, Rule 4(b)(12) (IOC orders); Rule 
4(b)(13) (IOC market orders); Rule 4(b)(11) (FOK orders); Rule 
4(b)(20) (sell short orders); Rule 4(b)(21) (short exempt orders); 
Rule 4(b)(19) (reserve size orders); Rule 4(b)(22) (time in force 
orders); and Rule 4(b)(3) (cancel on halt orders).
    \23\ See CHX Article 20, Rules 4(b)(12) (IOC orders) and 
4(b)(13) (IOC market orders).
    \24\ See CHX Article 20, Rule 4(b)(19).
    \25\ See CHX Article 20, Rule 4(b)(22). The Matching System 
initially would permit participants to identify any time period of a 
minute or a multiple of a minute as the ``time in force'' for a 
particular order. In later upgrades to the Matching System, 
participants would be allowed to identify an order's ``time in 
force'' in seconds.
    \26\ See CHX Article 20, Rule 4(b)(3).
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    The Matching System also would accept several different types of 
cross transactions, including a basic cross, a cross with size, a cross 
with satisfy, a cross with yield, a midpoint cross, an opening cross 
and a non-regular way cross. A basic cross transaction would be an 
order to buy and sell the same security at a specific price that is 
better than the Exchange's displayed BBO and, where required by the ITS 
Plan, another linkage plan or Reg. NMS, equal to or better than the 
NBBO.\27\ A cross with size would be a cross for at least 5,000 shares 
and for a value of $100,000 that is at a price equal to or better than 
the Exchange's displayed BBO (and, where required by the ITS Plan, 
another linkage plan, or Reg. NMS, equal to or better than the NBBO), 
where the size of the cross transaction is larger than the largest 
order displayed on the Exchange at that price.\28\ A cross with satisfy 
is designed to provide a participant with an efficient mechanism for 
clearing out displayed orders in the Matching System that would 
otherwise have time priority (or displayed bids or offers in other 
market centers that would otherwise have price priority) and then 
effecting a cross transaction at that price.\29\ A cross with yield is 
a similar order type, which would automatically yield interest on the 
buy, sell or either side of the order to any order already displayed in 
the Matching System at the same or better price.\30\ And, finally, as 
their names suggest, an opening cross is a cross transaction that would 
be specifically designated to be executed at the opening price; a non-
regular way cross would be designated for non-regular way settlement; 
and a midpoint cross would execute at the midpoint between the 
NBBO.\31\
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    \27\ See CHX Article 20, Rule 4(b)(4). A cross may represent 
interest of one or more Exchange participants, trading for a 
proprietary account. This order or transaction type is already 
permitted in the Exchange's electronic book. See CHX Article XXA, 
Rule 2.
    \28\ See CHX Article 20, Rule 4(b)(6). A cross with size is 
already permitted in the Exchange's electronic book and is similar 
to the type of transaction that can take place on the Exchange's 
trading floor. See CHX Article XXA, Rule 2; CHX Article XX, Rule 23. 
The proposed definition of a cross with size transaction would 
reduce the required number of shares in the order to 5,000 shares 
from 25,000 shares, mirroring similar requirements in the floor 
trading rules of other markets. See Boston Stock Exchange Rules, 
Chapter II, Section 18; Philadelphia Stock Exchange Rule 126(h). At 
the same time, the definition would be changed to also require that 
a cross must have a value of $100,000. The Exchange represents that 
it has imposed this requirement based on input from Commission staff 
that it is required for any market operated by a national securities 
exchange and based on an assurance from Commission staff that all 
national securities exchanges would be required to impose a similar 
requirement. The proposed definition of a cross with size 
transaction also would confirm that this order could represent 
interest of one or more participants of the Exchange.
    \29\ See CHX Article 20, Rule 4(b)(5). With this order type, a 
participant would send: (A) An instruction to execute a cross 
transaction at a specific price; and (B) an instruction (i) To 
execute orders already displayed in the Matching System at their 
limit prices (up to a specified number of shares) against a 
specified party to the extent necessary to allow the cross 
transaction to occur and/or (ii) to route outbound orders or 
commitments to other market centers to the extent necessary to 
prevent an improper trade-through. If a cross with satisfy is sent 
with a share size that is too small to satisfy orders in the 
Matching System or bids or offers in other markets, as applicable, 
the order would be automatically cancelled. Once the satisfying 
execution has occurred (or, for orders or commitments sent to other 
market centers, those orders or commitments have been sent), the 
cross would be executed at a price that is better than the best bid 
or offer to be displayed in the Matching System and, for securities 
listed on NYSE, Amex and any exchange other than Nasdaq (and for 
Nasdaq-listed securities, when Reg. NMS is implemented in those 
issues), equal to or better than the NBBO.
    A cross with satisfy may represent interest of one or more 
participants of the Exchange but, to the extent that it represents 
interest of the participant sending the order to the Matching 
System, the participant would not be eligible to satisfy existing 
bids or offers in the Matching System at a price that is better than 
the cross price and could only satisfy bids or offers in other 
markets at a price that is better than the cross price if the cross 
is for at least 10,000 shares or has a value of at least $200,000 (a 
``block size order'') or is for the account of an institutional 
customer (as that term is defined in CHX Article 8, Rule 11, 
Interpretation and Policy .03) and the participant's customer has 
specifically agreed to that outcome.
    \30\ See CHX Article 20, Rule 4(b)(7). This order would have: 
(A) An instruction to execute a cross transaction at a specific 
price; and (B) an instruction to yield interest on the buy, sell or 
either side of the order (as specified in the order) to any order 
already displayed in the Matching System at the same or better 
price, to the extent necessary to allow the cross transaction to 
occur. The cross would be executed at a price that is better than 
the best bid or offer to be displayed in the Matching System and, 
for securities listed on NYSE, Amex and any exchange other than 
Nasdaq (and for Nasdaq-listed securities, when Reg. NMS is 
implemented in those issues), equal to or better than the NBBO.
    \31\ See CHX Article 20, Rule 4(b)(16) (opening cross); Rule 
4(b)(15) (non-regular way cross); and Rule 4(b)(14) (midpoint 
cross). As described later in this submission, opening cross orders 
would execute immediately after the primary market opens in a 
security, at the opening price. For securities listed on NYSE, Amex 
and any exchange other than Nasdaq, the opening price would be the 
primary market opening price. For Nasdaq-listed securities (except 
in the case of an initial IPO), the opening price would be the 
midpoint of the first unlocked, uncrossed market that occurs on or 
after 8:30 a.m. For Nasdaq-listed securities on the date of an IPO, 
the opening price would be the Nasdaq opening price. Opening cross 
orders would not be accepted in securities exclusively listed on the 
Exchange and would not be accepted if any part of the sell side of 
the order is marked as a sell short order. A midpoint cross would be 
executed at the midpoint of the NBBO, but if the NBBO is locked at 
the time a midpoint cross is received, the midpoint cross would 
execute at the locked NBBO. If the NBBO is crossed at the time a 
midpoint cross is received, the midpoint cross would be 
automatically cancelled.
    A non-regular way settlement cross would execute without regard 
to the NBBO or any other orders the Matching System and could 
represent the interest of one or more participants in the Exchange. 
Any non-regular way cross that is for cash settlement must be 
received by the Matching System by 2 p.m. or such other time that 
may be established by the Exchange and communicated to participants 
from time to time. The Matching System would not accept one-sided 
orders for non-regular way settlement. The only way to effect a non-
regular way transaction within the Matching System would be through 
a non-regular way cross. Exchange participants currently may execute 
orders for non-regular way settlement, both on the floor of the 
Exchange and in the Exchange's electronic book. See CHX Article XX, 
Rule 9; CHX Article XXA, Rule 2(c)(5).
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    The Matching System also would accept several order types that are 
specifically contemplated by Reg. NMS.\32\ For example, the Matching 
System would accept benchmark orders which meet the requirements of 
Rule 611(b)(7) of Reg. NMS. Initially, the Exchange would limit 
submission of benchmark orders to the Exchange's institutional 
brokers.\33\ The Matching

[[Page 47839]]

System would also accept BBO intermarket sweep orders (``BBO ISOs''), 
which would execute against orders at the Exchange's BBO, without 
regard to whether the execution would trade through another market's 
protected quotation.\34\ If a BBO ISO is marked as ``immediate or 
cancel,'' any remaining balance in the order would be automatically 
cancelled. If a BBO ISO is not marked as ``immediate or cancel,'' any 
remaining balance in the order would be placed in the Matching System 
and displayed, without regard to whether that display would lock or 
cross another market center.\35\ Two other Reg. NMS-related orders--an 
outbound ISO and a price-penetrating ISO--would also be accepted by the 
Exchange's Matching System.\36\
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    \32\ These order types--and other expressly-identified 
provisions--take effect with the implementation of Rule 611 of Reg. 
NMS. 17 CFR 242.611. The Exchange will use February 5, 2007 (the 
``Trading Phase Date'') as the effective date for these provisions. 
See Securities Exchange Act Release No. 53829 (May 18, 2006), 71 FR 
30038 (May 24, 2006) (setting new compliance dates for Rules 610 and 
611).
    \33\ The Exchange initially has limited the use of this order 
type to its institutional brokers to ensure that the Exchange can 
determine whether or not the requirements of Rule 611(b)(7) Reg. NMS 
have been met. See CHX Article 20, Rule 4(b)(2). A benchmark order 
may execute at any price, without regard to the protected NBBO and 
may represent interest of one or more Exchange participants.
    \34\ See CHX Article 20, Rule 4(b)(1). These orders are executed 
based on the premise that the participant routing the order to the 
Matching System has already satisfied the protected quotations of 
other market centers. See CHX Article 20, Rule 6(c)(3).
    \35\ These orders are displayed based on the premise that the 
participant routing the order to the Matching System has already 
satisfied the quotations of other markets so that the display of the 
order would not lock or cross those markets.
    \36\ An outbound ISO would allow an Exchange participant to ask 
the Exchange to execute an order on the Exchange without regard to 
the protected quotations at other markets while simultaneously 
routing ISOs to those other markets to execute against their 
protected quotations. See CHX Article 20, Rule 4(b)(17). A price-
penetrating ISO would operate much like a basic ISO, except that it 
would allow a participant to execute through displayed and 
undisplayed interest, at multiple price points, on the Exchange. See 
CHX Article 20, Rule 4(b)(18).
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    Finally, the Matching System would accept do-not-display and do not 
route orders. A do not route order, as its name implies, would be 
executed or displayed within the Matching System and could not be 
routed to another market center.\37\ A do-not-display order would be an 
order, for at least 1,000 shares when entered, that should not be 
displayed in whole or in part, but that would remain eligible for 
execution within the Matching System.\38\
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    \37\ As further described in the section relating to the 
prevention of trade-throughs, a do not route order would be 
immediately cancelled if its execution would improperly trade 
through the ITS BBO or another market's protected quotations. Any 
types of cross, IOC or FOK orders would deemed to have been received 
with a ``do not route'' condition because these orders either are 
immediately executed in the Matching System or cancelled. See CHX 
Article 20, Rule 4(b)(10).
    \38\ See CHX Article 20, Rule 4(b)(9). A do-not-display order 
could receive that designation because a customer specifically 
instructed a participant not to display the order or because a 
participant decided that its own order should not be displayed. As 
described later in this submission, a do-not-display order would be 
ranked, at any given price point, behind displayed orders (and any 
odd-lot and mixed-lot orders at the price) and behind the 
undisplayed portions of any reserve size orders. These completely 
undisplayed orders would both allow a participant to fulfill a 
customer's instructions and to otherwise keep trading interest 
hidden, but to remain within the Matching System where the orders 
could be executed against inbound orders seeking liquidity.
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    5. Ranking of orders in the Matching System. As described in CHX 
Article 20, Rule 8, all orders received by the Matching System would be 
ranked by price, time of receipt and, for round-lot orders, any display 
instructions received with the orders. Specifically, orders received by 
the Matching System would be ranked as follows:
    a. Orders that are eligible for display, as well as mixed-lot and 
odd lot orders. Limit orders that are eligible to be displayed, 
including the displayed portion of reserve size orders, and all odd-lot 
and mixed-lot orders would be ranked together, at each price point, in 
time priority.\39\
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    \39\ For the most part, executions in the Matching System would 
occur on a ``share-for-share'' basis, regardless of whether the 
incoming or resting orders were round-lot, mixed-lot or odd-lot 
orders. The one exception to this share-for-share matching is in the 
handling of ITS commitments or linkage plan orders, which would only 
be matched in round-lot increments, for the full amount of round-lot 
shares available at the price reflected in the NBBO. See CHX Article 
20, Rule 8(e)(9). Any remaining portion of the ITS commitment or 
linkage plan order would then be automatically cancelled.
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    b. Orders that are displayed in part, where a portion is not 
displayed. At each price point, the undisplayed portions of reserve 
size orders would be ranked together in time priority and would be 
ranked after any displayed orders (and any odd-lot and mixed-lot 
orders) at that price.
    c. Completely undisplayed orders. Orders that are received with a 
do-not-display instruction would be ranked together, at each price 
point, in time priority and would be ranked after any other orders at 
that price.
    Changes to an order's size or price, or its displayed portion, 
could impact its ranking within the Matching System. For example, when 
the displayed portion of a reserve size order is refreshed with new 
volume, the displayed portion of the order would receive a new ranking 
based on the time at which it was refreshed.\40\ Similarly, if a 
participant increases the number of shares in a fully-displayed order, 
that order would receive a new ranking based on the time at which these 
shares were added to the order.\41\ Any change in the price of an order 
would result in a new price and time ranking for the order, based on 
the time of the price change.\42\ Finally, any change to the display 
instruction associated with an order would result in a new ranking for 
the order based on the time that the new instruction was received.\43\
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    \40\ See CHX Article 20, Rule 8(b)(4). Any remaining undisplayed 
portion of the order would continue to be ranked at the price and 
time at which it was originally received.
    \41\ See CHX Article 20, Rule 8(b)(5). Any reduction in the 
number of shares in an order, however, would not change its ranking 
within the Matching System.
    \42\ Id.
    \43\ Id.
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    6. Display of orders within the Matching System. All orders that 
are eligible for display would be immediately and publicly displayed 
through the processes set out in the appropriate transaction reporting 
plan for each security when they constitute the best round-lot bid or 
offer in the Matching System for that security. In addition, the 
Matching System would aggregate all shares, including odd-lot orders 
and the odd-lot portions of mixed-lot orders, at a single price point, 
and then round that total share amount down to the nearest round-lot 
amount for display purposes.\44\ The undisplayed portion of a reserve 
size order and any other orders received with a do-not-display 
instruction would not be eligible for display.
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    \44\ This aggregation and rounding process would apply for 
display purposes only; all orders would retain their rankings for 
execution purposes as described in CHX Article 20, Rule 8(b)(1) 
through (5). However, as noted in CHX Article 20, Rule 8(g), the 
Matching System would report each round-lot transaction that occurs 
within the Matching System, including executions of resting odd-lot 
orders that have been aggregated into one or more round-lots for 
display purposes, to the appropriate consolidated reporting system.
---------------------------------------------------------------------------

    The Exchange believes that its disseminated quotations would 
constitute automated quotations under the definition set out in Rule 
600(b)(3) of Reg. NMS.\45\ The Exchange's proposed rules confirm that 
each order submitted to the Matching System must be a firm order and 
cannot be identified as a ``manual'' quotation.\46\
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    \45\ As required by Rule 600(b)(3) of Reg. NMS in its definition 
of ``automated quotations,'' the Exchange's Matching System is 
designed to accept IOC orders; to immediately and automatically 
execute an IOC order against the displayed BBO, up to its full size; 
to immediately and automatically cancel any unexecuted portion of 
the IOC order without routing the order elsewhere; to immediately 
and automatically transmit a response to the order-sending 
participant indicating the action taken on the order; and to 
immediately and automatically update the BBO to reflect any change 
that occurred as a result of the execution.
    \46\ See CHX Article 20, Rule 3(a).
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    7. Opening of the regular trading session. Immediately after the 
primary market opens, the Matching System would execute all opening 
cross orders, then start accepting and matching orders as provided in 
CHX Article 20, Rule 8(d).\47\ If the primary market in a

[[Page 47840]]

security other than a Nasdaq-listed security opens with a quote, but 
has not reported a trade for 30 seconds following the dissemination of 
the initial quote, the Matching System would cancel all opening cross 
orders, and then start accepting and matching all other orders.\48\
---------------------------------------------------------------------------

    \47\ See CHX Article 20, Rule 8(d).
    \48\ Id. This provision would apply only to securities other 
than Nasdaq-listed securities. As noted above, Nasdaq-listed 
securities would open based on the first unlocked, uncrossed market 
that occurs on or after 8:30 a.m.
---------------------------------------------------------------------------

    8. Automated matching of orders. With certain exceptions 
specifically set out in CHX Article 20, Rule 8(e), and subject to the 
provisions relating to the prevention of trade throughs that are set 
out in CHX Article 20, Rule 5, incoming orders would be matched against 
one or more orders in the Matching System, in the order of their 
ranking, at the price of each resting order, for the full amount of 
shares available at that price or for the size of the incoming order, 
if smaller.\49\ If an order could not be immediately matched or matched 
in full when received (and it is not designated as an order type that 
should be immediately cancelled), it or its residual portion would be 
placed in the Matching System and ranked as described above.\50\
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    \49\ See CHX Article 20, Rule 8(d)(1).
    \50\ See CHX Article 20, Rule 8(d)(2). Orders that would be 
immediately cancelled, if not executed, include FOK orders and IOC 
limit and market orders. See CHX Article 20, Rules 4(b)(11) through 
(13).
---------------------------------------------------------------------------

    The following order types would be subject to specific executions 
within the Matching System:
    a. Benchmark orders. Benchmark orders, which are cross transactions 
submitted by institutional brokers that meet the requirements of Rule 
611(b)(7) of Reg. NMS, would execute at any price, without regard to 
the NBBO and may represent the interest of one or more participants of 
the Exchange.\51\
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    \51\ See CHX Article 20, Rule 8(e)(1) and Rule 4(b)(2). A 
benchmark order is defined in Rule 611(b)(7) of Reg. NMS as an order 
that is executed at a price that was not based, directly or 
indirectly, on the quoted price of the security at the time of 
execution and for which the material terms were not reasonably 
determinable at the time the commitment to execute the order was 
made.
---------------------------------------------------------------------------

    b. Cross and cross with size orders. Cross and cross with size 
orders would be automatically executed if they meet the requirements 
set out in Rule 4(b)(4) and (6) respectively, but would be immediately 
and automatically cancelled if they do not meet these requirements.\52\
---------------------------------------------------------------------------

    \52\ See CHX Article 20, Rule 8(e)(1).
---------------------------------------------------------------------------

    c. Cross with satisfy orders. In executing this order type, the 
Matching System first would determine whether the order contains a 
share size that is sufficient to satisfy orders in the Matching System 
or bids or offers in other markets, as applicable. If this requirement 
is not met, the cross with satisfy would be automatically 
cancelled.\53\
---------------------------------------------------------------------------

    \53\ See CHX Article 20, Rule 8(e)(4).
---------------------------------------------------------------------------

    If the order meets this requirement, the Matching System then would 
satisfy existing orders in the Matching System or send orders or 
commitments to other market centers to satisfy bids or offers, as 
necessary to prevent a trade-through and, before updating the 
Exchange's quotes, would execute the cross at a price that is better 
than the best bid or offer to be displayed in the Matching System and, 
for securities listed on NYSE, Amex or any other exchange other than 
Nasdaq (and for Nasdaq-listed securities, when Reg. NMS is implemented 
in those issues), equal to or better than the NBBO. In doing so, the 
Matching System would determine whether the Participant that sent the 
order to the Matching System is attempting to satisfy bids or offers in 
the Matching System at a price that is better than the cross price and, 
if so, would not allow those executions to occur, but would instead 
allocate the better prices to the customer, not to the Participant 
sending the order to the Matching System.
    d. Cross with yield orders. When the customer order that is part of 
a cross with yield order is eligible for an immediate execution because 
it is at a price better than the currently displayed best bid or offer 
in the Matching System, the cross with yield order would be 
automatically executed by matching the participant as principal against 
the customer order; provided, however, that if there is any order 
already displayed in the Matching System at the same price as (or 
better than) the participant's interest, that order or those orders 
would be matched against the customer order in place of the 
participant's interest as necessary to exhaust the customer order 
interest.\54\ If the customer order that is part of a cross with yield 
order is not eligible for an immediate execution because it is not 
better than the currently displayed bid or offer in the Matching 
System, the cross with yield order would be immediately and 
automatically cancelled.
---------------------------------------------------------------------------

    \54\ See CHX Article 20, Rule 8(e)(2).
---------------------------------------------------------------------------

    e. Midpoint cross. A midpoint cross order would be immediately 
executed at the midpoint between the NBBO. If the NBBO is locked at the 
time the order is received, the midpoint cross would be executed at the 
locked market price, unless the order could be executed in subpenny 
increments. If the NBBO is crossed at the time the order is received, 
the midpoint cross would be immediately and automatically 
cancelled.\55\
---------------------------------------------------------------------------

    \55\ See CHX Article 20, Rule 4(b)(14).
---------------------------------------------------------------------------

    f. Non-regular way cross orders. These orders would be 
automatically executed without regard to either the NBBO or any orders 
for regular way settlement that might be in the Matching System.\56\
---------------------------------------------------------------------------

    \56\ See CHX Article 20, Rule 4(b)(15).
---------------------------------------------------------------------------

    g. Sell short orders. Sell short orders (including odd lot orders) 
would be displayed and executed only when permissible under the 
provisions of Rule 10a-1 (``Short Sale Rule'') and Regulation SHO.\57\ 
When a sell short order cannot be executed or displayed at its limit 
price under the provisions of the Short Sale Rule and Regulation SHO, 
the order would be automatically repriced (without violating its limit 
price) to the next available price at which it can be executed or 
displayed.\58\
---------------------------------------------------------------------------

    \57\ Because there is no exemption from the requirements of the 
Short Sale Rule or Reg. SHO for odd lots executed within a system 
such as the Matching System, odd lot orders would be treated as all 
other orders in determining whether they could be executed under the 
Short Sale Rule and Reg. SHO.
    \58\ See CHX Article 20, Rule 8(e)(5).
---------------------------------------------------------------------------

    h. Do not display orders. A do-not-display order would be executed 
as provided in CHX Rule 8(d), but would be immediately and 
automatically cancelled if, at any point, the order would prevent the 
execution of an inbound order because the do-not-display order has 
crossed the NBBO.\59\
---------------------------------------------------------------------------

    \59\ See CHX Article 20, Rule 8(e)(6).
---------------------------------------------------------------------------

    i. Inbound ITS commitment or linkage plan order. An inbound ITS 
commitment or linkage plan order, if it is priced at or better than the 
current Exchange-displayed BBO (or if it is marked ``market''), would 
be automatically matched, in round-lot increments, against the order(s) 
at the price reflected in the BBO (or at a better undisplayed price), 
for the full amount of round-lot shares available at that price, and 
any remaining portion of the ITS commitment or linkage plan order would 
be automatically cancelled.\60\ An inbound ITS commitment marked as a 
``block'' trade would be automatically matched, in round-lot 
increments, at the price reflected in the ITS commitment, against the 
order(s) in the Matching System, in regular price-time priority.
---------------------------------------------------------------------------

    \60\ See CHX Article 20, Rule 8(e)(7). The Exchange believes 
that this handling of ITS commitments and linkage plan orders is 
consistent with the ITS Plan and the current draft of the linkage 
plan that might replace the ITS Plan.
---------------------------------------------------------------------------

    j. Trades in locked markets. Trades would continue to be executed 
in the Matching System when the NBBO is

[[Page 47841]]

crossed; provided however, that (i) If the ITS Plan requires that the 
Matching System route the inbound order to another market for 
execution, the Matching System would do so or, if the order is marked 
``do not route,'' the Matching System would automatically cancel the 
order; and (ii) once Reg. NMS is implemented in a security, the 
Matching System would only execute orders in that security up to (but 
not beyond) the first uncrossed NBBO.\61\
---------------------------------------------------------------------------

    \61\ See CHX Article 20, Rule 5, Interpretation and Policy 
.01(e).
---------------------------------------------------------------------------

    9. Prevention of trade-throughs and other order routing. The 
Exchange's Matching System would prevent the execution of all or a part 
of an inbound order for at least a round lot if the execution would 
cause an improper trade-through of another ITS market or if, when Reg. 
NMS is implemented for a security, the execution of all or a part of 
the order would be improper under Reg. NMS Rule 611.\62\ Inbound odd 
lot orders and odd lot crosses would be eligible for execution on the 
Exchange, even if they would trade through other markets' bids and 
offers.
---------------------------------------------------------------------------

    \62\ See CHX Article 20, Rule 5. At least initially, however, 
the Exchange would not apply the ``flickering quote'' exception to 
Rule 611 of Reg. NMS (Reg. NMS Rule 611(b)(8)) when determining 
whether or not the execution of the order would create an improper 
trade-through.
---------------------------------------------------------------------------

    If a participant has submitted a cross with satisfy or an outbound 
ISO order and its execution would cause an improper trade through, the 
Matching System would execute the order and simultaneously route 
commitments or orders to other markets to satisfy their protected 
quotes. In these situations, the Exchange's systems would determine 
when, how and where these orders (or commitments) should be routed to 
satisfy protected quotes. The Exchange would route these orders (or 
commitments), at the participant's election, either through the 
Intermarket Trading System (or any later linkage that supersedes ITS) 
or through the connectivity provided by a routing services provider 
with whom the Exchange has negotiated an agreement.
    The Exchange will provide these routing services pursuant to the 
terms of three separate agreements, to the extent that they are 
applicable to a specific routing decision: (1) An agreement between the 
Exchange and each Participant on whose behalf orders will be routed 
(``Participant-Exchange Agreement''); (2) an agreement between each 
Participant and a specified third-party broker-dealer that will use its 
routing connectivity to other markets and serve as a ``give-up'' in 
those markets (``Give-Up Agreement''); and (3) an agreement between the 
Exchange and the specified third-party broker-dealer (``Routing 
Connectivity Agreement'') pursuant to which the third-party broker-
dealer agrees to provide routing connectivity to other markets and 
serve as a ``give-up'' for the Exchange's Participants in other 
markets. The Exchange will provide these routing services in compliance 
with its rules and with the provisions of the Act and the rules 
thereunder, including, but not limited to, the requirements of Sections 
6(b)(4) and (5) of the Act that the rules of a national securities 
exchange provide for the equitable allocation of reasonable dues, fees 
and other charges among its members and issuers and other persons using 
its facilities, and not be designed to permit unfair discrimination 
between customers, issuers, brokers or dealers. The Routing 
Connectivity Agreement will include terms and conditions that enable 
the Exchange to comply with these obligations.
    In addition to these routing services, the Exchange is developing a 
functionality that would, in all other situations where the execution 
of an inbound round lot order, in whole or in part, would cause a 
trade-through, (a) Route the order to another venue, according to each 
participant's instructions, or (b) if the order is marked ``do not 
route,'' automatically cancel the order.\63\ The Exchange plans to 
supplement this filing, or file a new rule submission, with respect to 
this functionality, as soon as possible.
---------------------------------------------------------------------------

    \63\ There would be one exception to the general rule that an 
inbound ``do not route'' order would be cancelled if its execution 
would constitute an improper trade-through. If an undisplayed order 
is resting in the Matching System and the execution of an inbound 
order (that is not an IOC or FOK order) against the undisplayed 
resting order would cause an improper trade-through, the resting 
order would be cancelled to the extent necessary to allow the 
inbound order to be executed or quoted.
---------------------------------------------------------------------------

    The Exchange has developed an initial series of trade-through 
policies and procedures that describe how the Exchange will implement 
the provisions of Rule 611 of Reg. NMS.\64\ These procedures describe 
the Exchange's clock synchronization practices, as well as its plans 
for applying the exceptions to Rule 611 of Reg. NMS.\65\ Among other 
things, these procedures confirm that the Exchange would apply the 
self-help exception (and disregard another market's quotations for 
trade-through purposes) when that market has publicly announced that it 
is not disseminating automated quotations (but has not identified those 
quotes as manual); or when the Exchange has a reasonable basis for 
believing that the other market is experiencing systems problems and 
that market (a) Has not responded, within 30 seconds, to an Exchange 
inquiry seeking information about possible systems problems, or (b) has 
not confirmed, within two minutes after an Exchange inquiry, that it is 
not having systems problems.\66\ These procedures also confirm that the 
Exchange automatically would place an appropriate modifier on trades 
executed pursuant to an exemption from, or exception to, Rule 611 of 
Reg. NMS in accordance with specifications approved by the operating 
committee of the relevant national market system plan for an NMS 
stock.\67\
---------------------------------------------------------------------------

    \64\ See CHX Article 20, Rule 5, Interpretation and Policy .01. 
The Exchange will further define its policies in more detail over 
the next month or so.
    \65\ The Exchange's systems will routinely, throughout the 
trading day, use processes that capture the time reflected on the 
atomic clock operated by the National Institute of Standards and 
Technology and will automatically make adjustments to the time 
recorded in the Exchange's Matching System to ensure that the period 
between the two times does not exceed 500 milliseconds.
    \66\ See CHX Article 20, Rule 5, Interpretation and Policy 
.01(d). The Exchange would notify the other market of its use of the 
self-help exception by using appropriate technology made available 
for intermarket communications from time to time. The Exchange then 
would continue to apply this self-help exception until the other 
market has provided reasonable assurance to the Exchange (or to the 
public) that the problems have been corrected.
    \67\ See CHX Article 20, Rule 5, Interpretation and Policy 
.01(h). In addition, if an on-Exchange participant submits an 
outbound ISO order (consisting of an order to execute on the 
Exchange, coupled with outbound ISOs to execute against protected 
quotations of other markets), the Matching System will not execute 
the order on the Exchange until it either simultaneously routes ISOs 
to other markets or confirms that the participant submitting the 
order has simultaneously routed ISOs designed to execute against the 
full size of any other market's protected bid or offer, as required 
by Rule 600(b)(30) and Rule 611(b)(6) of Reg. NMS.
---------------------------------------------------------------------------

    The Exchange's initial trade-through policies also describe its 
plans for confirming that its own bids and offers qualify as automated 
quotations. Specifically, the Exchange would periodically (no less 
often than once every five seconds and no more often than once every 
second) send a test IOC order to the Matching System to determine 
whether the Exchange's Matching System accepts the order and would use 
automated monitoring systems to further measure the Matching System's 
handling of test IOC orders within the Matching System.\68\ These

[[Page 47842]]

monitoring systems would provide immediate reports to other Exchange 
systems for further handling. If these systems receive a report that 
gives the Exchange reason to believe that it is not capable of 
displaying automated quotations, the Exchange would automatically and 
immediately append a ``manual'' identifier to the bids and offers it 
makes publicly available.\69\ The Exchange would not remove this 
``manual'' identifier until it has determined that its quotations 
qualify as automated quotations. It would then notify other markets 
that its quotations are automated to ensure that all markets recognize 
the Exchange's bids and offers as automated quotations.
---------------------------------------------------------------------------

    \68\ These systems would review, in real time, the Matching 
System's handling of test IOC orders to determine whether, and 
within what time frame, (i) IOC orders are executed against the 
displayed quote, up to its full size; (ii) any unexecuted portion of 
the IOC order is cancelled; (iii) a confirmation of the action taken 
is generated and transmitted from the Matching System to the 
monitoring system (to serve as a proxy for a transmission to the 
order-sending firm); and (iv) the Matching System transmits a new 
bid or offer (as appropriate) to the monitoring system (to serve as 
a proxy for a transmission to the appropriate securities information 
processor).  See CHX Article 20, Rule 5, Interpretation and Policy 
.02(a).
    \69\ In the event that the Exchange's systems do not permit the 
Exchange to disseminate a ``manual'' identifier, the Exchange would 
announce that its quotes are manual over an appropriate 
functionality available for communications with other market 
centers. See CHX Article 20, Rule 5, Interpretation and Policy 
.02(b).
---------------------------------------------------------------------------

    10. Locking and crossing quotations. An order would not be 
displayed on the Exchange if its display would improperly lock or cross 
the ITS best bid or offer or, when Reg. NMS is implemented for a 
security, if its display would constitute a locking or crossing 
quotation.\70\ These otherwise locking or crossing orders would either 
be routed to another appropriate market or, if designated as ``do not 
route,'' would be automatically cancelled.
---------------------------------------------------------------------------

    \70\ See CHX Article 20, Rule 6(d).
---------------------------------------------------------------------------

    11. Clearing the matching system. To ensure that orders on the 
Exchange have an appropriate opportunity to interact with each other, 
institutional brokers ordinarily would be required to clear the 
Matching System before sending an order to another market for 
execution.\71\ Any outbound ITS commitments that are seeking liquidity 
in another market--whether they represent agency or proprietary 
interest--would be required to first clear the displayed and 
undisplayed orders in the Exchange's Matching System before being sent 
through the ITS System. Outbound ITS commitments (or ISOs) that are 
being sent to another market to satisfy its displayed bid or offer, 
however, would not be required to clear the Exchange's Matching System 
before being sent to the other market.\72\ Additionally, an 
institutional broker would not be required to clear the Matching System 
if the customer order that is being sent to another market could not be 
executed in the Matching System (e.g., the order is a stop or stop 
limit order which has not yet been elected).\73\
---------------------------------------------------------------------------

    \71\ If a customer specifically requests otherwise, an 
institutional broker is not required to clear the Matching System. 
See CHX Article 20, Rule 7(a). Institutional brokers would be 
required to document any directives for special handling of orders 
under this rule. See CHX Article 20, Rule 7(b).
    \72\ See CHX Article 20, Rule 7(c).
    \73\  See CHX Article 20, Rule 7(d).
---------------------------------------------------------------------------

    12. Trading halts. Under the proposed rules, two senior officers of 
the Exchange would be authorized to suspend and restart trading within 
a trading session or to halt trading for the remainder of a trading 
session, in one or more securities, when the officials believe it is in 
the public interest.\74\ If trading in one or more issues is suspended 
or halted, the Matching System would not accept any additional orders 
and would resume quoting and matching orders only after the end of the 
trading halt.\75\ Because the Matching System would not be locked or 
crossed when trading is halted, and because it would not accept orders 
during the halt, the Matching System would be able to emerge from the 
halt without any special reopening process, by simply displaying its 
BBO and then accepting and matching orders as provided by the Matching 
System rules described above.
---------------------------------------------------------------------------

    \74\ See CHX Article 20, Rule 1(d). Under the Exchange's current 
rules, a trading halt could be declared by the chairman or vice 
chairman of the Exchange's Board of Directors, or by its president, 
with the prior approval of a director from a participant firm and a 
director from the trading floor. The Exchange believes that it no 
longer is appropriate or effective to require its directors to 
participate in the decisions to suspend or halt trading, 
particularly with the automated environment proposed by the new 
trading model and the fact that the Exchange will no longer be 
operating a trading floor.
    \75\ See CHX Article 20, Rule 1, Interpretation and Policy .02. 
Participants could cancel orders during the halt.
---------------------------------------------------------------------------

    13. Cancelling transactions/handling clearly erroneous 
transactions. Under the proposed rules, participants that make a 
transaction in demonstrable error could agree to cancel and unwind the 
transaction, subject to the approval of the Exchange.\76\ The Exchange 
also proposes to extend its current electronic book rule for the 
handling of clearly erroneous transactions, with a few minor changes, 
to the operation of the Matching System.\77\ This rule would allow the 
Exchange to review, and potentially modify or cancel, executions where 
one party believes that the terms of the transaction were clearly 
erroneous when submitted. A related rule relating to systems 
disruptions and malfunctions would allow the Exchange to modify or 
cancel executions that result from a disruption or malfunction in the 
use or operation of the Matching System, or any communications system 
associated with the Matching System or when extraordinary market 
conditions or other circumstances exist in which the nullification or 
modification of transactions may be necessary for the maintenance of a 
fair and orderly market or the protection of investors and the public 
interest. The proposed rules set out procedures for each of these 
reviews, including specific means for participants to appeal the 
Exchange's decisions.\78\
---------------------------------------------------------------------------

    \76\ See CHX Article 20, Rule 9.
    \77\ See CHX Article 20, Rule 10; see also CHX Article XXA, Rule 
7 (the policy approved for use within the electronic book).
    \78\ For example, a participant seeking review of a ``clearly 
erroneous'' transaction would be required to notify the Exchange of 
the request immediately after the execution by telephone, and within 
15 minutes after the execution in writing. The Exchange would 
promptly notify the other party to the transaction. Both parties 
then would be required to submit information relating to the 
disputed transaction, within specified time frames. After reviewing 
the transaction, an Exchange official would notify both parties of 
his or her decision, in writing; either party could appeal the 
decision to a subcommittee of the Exchange's Committee on Exchange 
Procedure and, if not satisfied, to the full Committee on Exchange 
Procedure. In making his or her decision, the Exchange official 
would consider the goals of maintaining a fair and orderly market 
and protecting investors and the public interest; if an Exchange 
official determines that a transaction was clearly erroneous, he or 
she would try to return the parties to the positions that they would 
have been in (or positions reasonably similar to those positions) if 
the error had not occurred. Similarly, in the event of a disruption 
or malfunction that impacts the operation or use of the Matching 
System (or in the event of extraordinary market conditions or other 
circumstances), an Exchange official could declare transactions void 
or modify transactions. Absent extraordinary circumstances, any 
Exchange action to void or modify transactions in this manner must 
be taken within 30 minutes of detection of the erroneous 
transaction, but in no event later than 2 p.m. on the trading day 
following the date of the trade at issue. The official would be 
required to notify each member involved in the transaction as soon 
as practicable after making any decision; decisions could be 
appealed using the procedure set out for the review of decisions 
addressing clearly erroneous transactions.
---------------------------------------------------------------------------

    14. The late trading session. The Exchange's Matching System would 
begin accepting orders for the late trading session immediately after 
the closing of the regular trading session.\79\ Orders for the late 
trading session would be matched according to the same process used 
during the regular trading session. As noted above, the late trading 
session would end at 3:30 p.m.
---------------------------------------------------------------------------

    \79\  See CHX Article 20, Rule 8(c)(2). Orders for the late 
trading session would not be allowed queue before the close of the 
regular trading session; they would only be accepted by the Exchange 
after the close of the regular trading session.
-------------------------------------