Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Order Approving a Proposed Rule Change and Amendment No. 1 Thereto and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 2 Thereto to Implement a New Trading Model, 59563-59573 [E6-16626]
Download as PDF
Federal Register / Vol. 71, No. 195 / Tuesday, October 10, 2006 / Notices
jlentini on PROD1PC65 with NOTICES
• Change references to the ‘‘Chief
Regulatory Officer’’ in the AWC to the
‘‘General Counsel or his/her delegatee’’;
• Add a provision in BSE Rule
Chapter XXX imposing a late charge
when a member fails to pay a fine on a
timely basis;
• Add violations of the Exchange’s
rules governing the Intermarket Trading
System to BSE Rule Chapter XXXIV;
• Restructure the fine levels of
violations in BSE Rule Chapter XXXIV
pertaining to Failure to Display Limit
Orders, Floor Order Facilitation, Failure
to Designate an Order (PPS), and
Dealings Outside of Exchange Operating
Hours; and
• Adjust the fine levels for short sale
violations in BSE Rule Chapter XXXIV.
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.4 In particular, the
Commission believes that the proposal
is consistent with Section 6(b)(5) of the
Act,5 because delineating factors to be
considered in determining sanctions
should promote transparency of the
Exchange’s disciplinary process and the
ability to impose a late charge for the
failure to pay fines should help the
Exchange carry out its supervisory
responsibilities.
The Commission further believes that
the proposal is consistent with Sections
6(b)(1) and 6(b)(6) of the Act,6 which
require that the rules of an exchange
enforce compliance with, and provide
appropriate discipline for, violations of
Commission and Exchange rules. In
addition, because BSE Rule Chapter
XVIII provides procedural rights to
contest the fine for any violation of an
Exchange rule and permits disciplinary
proceedings on the matter, the
Commission believes BSE Rule Chapter
XXXIV, as amended by this proposal,
provides a fair procedure for the
disciplining of members and persons
associated with members, consistent
with Sections 6(b)(7) and 6(d)(1) of the
Act.7
Finally, the Commission finds that the
proposal is consistent with the public
interest, the protection of investors, or
otherwise in furtherance of the purposes
of the Act, as required by Rule 19d–
1(c)(2) under the Act 8 which governs
minor rule violation plans. The
4 In approviing this proposed rule change, 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).
5 15 U.S.C. 78f(b)(5).
6 15 U.S.C. 78f(b)(1) and 78f(b)(6).
7 15 U.S.c. 78f(b)(7) and 78f(d)(1).
8 17 CFR 240.19d–1(c)(2).
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16:42 Oct 06, 2006
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Commission believes that the proposed
change to BSE Rule Chapter XXXIV will
strengthen the Exchange’s ability to
carry out its oversight and enforcement
responsibilities as a self-regulatory
organization in cases where full
disciplinary proceedings are unsuitable
in view of the minor nature of the
particular violation.
In approving this proposed rule
change, as amended, the Commission in
no way minimizes the importance of
compliance with BSE rules and all other
rules subject to the imposition of fines
under the minor rule violation plan of
the Exchange. The Commission believes
that the violation of any self-regulatory
organization’s rules, as well as
Commission rules, is a serious matter.
However, the Exchange’s minor rule
violation plan under BSE Rule Chapter
XXXIV provides a reasonable means of
addressing rule violations that do not
rise to the level of requiring formal
disciplinary proceedings, while
providing greater flexibility in handling
certain violations. The Commission
expects that BSE will continue to
conduct surveillance with due diligence
and make a determination based on its
findings, on a case-by-case basis,
whether a fine of more or less than the
recommended amount is appropriate for
a violation under the minor rule
violation plan or whether a violation
requires formal disciplinary action
under BSE Rule Chapter XXX.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act 9 and Rule
19d–1(c)(2) under the Act,10 that the
proposed rule change (SR–BSE–2005–
09), as amended, be, and hereby is,
approved and declared effective.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.11
Nancy M. Morris,
Secretary.
[FR Doc. E6–16645 Filed 10–6–06; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54550; File No. SR–CHX–
2006–05]
Self-Regulatory Organizations;
Chicago Stock Exchange, Inc.; Order
Approving a Proposed Rule Change
and Amendment No. 1 Thereto and
Notice of Filing and Order Granting
Accelerated Approval to Amendment
No. 2 Thereto to Implement a New
Trading Model
September 29, 2006.
I. Introduction
On February 2, 2006, 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 its rules to implement a new
trading model that provides the
opportunity for fully automated
executions to occur within a central
matching system (the ‘‘Matching
System’’). On August 10, 2006, the
Exchange filed Amendment No. 1 to the
proposed rule change. The proposed
rule change, as amended by
Amendment No. 1, was published for
comment in the Federal Register on
August 18, 2006.3 The Commission
received one comment letter on the
proposal.4
On September 29, 2006, the Exchange
filed Amendment No. 2 to the proposed
rule change.5 This order approves the
proposed rule change, as amended by
Amendment No. 1. Simultaneously, the
Commission is providing notice of filing
of, and granting accelerated approval to,
Amendment No. 2 to the proposed rule
change.
II. Description
The Exchange proposes to amend its
rules in order to implement a new
trading model that would allow
Exchange participants to interact in a
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 54301
(August 10, 2006), 71 FR 47836 (‘‘Trading Rules
Notice’’).
4 See Letter from Michael A. Barth, Senior Vice
President, Exchanges and Market Centers, Order
Execution Services Holdings, Inc. (‘‘OES’’), to
Nancy M. Morris, Secretary, Commission, dated
August 25, 2006 (‘‘OES Letter’’).
5 See Form 19b–4 dated September 29, 2006
(‘‘Amendment No. 2’’). The text of Amendment No.
2 is available on CHX’s Web site (https://
www.chx.com), at the principal office of CHX, and
at the Commission’s Public Reference Room. See
infra Section II.E for a discussion of Amendment
No. 2.
2 17
9 15
U.S.C. 78s(b)(2).
CFR 240.19d–1(c)(2).
11 17 CFR 200.30–3(a)(12); 17 CFR 200.30–
3(a)(44).
10 17
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Federal Register / Vol. 71, No. 195 / Tuesday, October 10, 2006 / Notices
fully-automated Matching System. In
addition, the proposed rules would
enable qualifying participant firms to
register as ‘‘institutional brokers,’’ that,
among other things, would be permitted
to execute transactions outside of the
Matching System under specified
conditions.6 Many of the features of the
new trading model are designed to
comply with Regulation NMS 7 as of the
‘‘Trading Phase Date’’ for the
implementation of that regulation—
February 5, 2007.8 The Exchange is also
proposing a number of other changes to
its rules in an effort to update them
generally, as well as to reflect the
elimination of the trading floor and the
new automated trading system that will
be central to the Exchange’s new trading
model.
A. The Matching System
The Matching System would be the
core facility of the Exchange’s new
trading model. The Exchange would no
longer operate a physical trading floor,
but rather would operate an automated
Matching System where Exchange
participants could submit orders from
any location for possible immediate
execution.
1. Eligible Orders and Order Types
jlentini on PROD1PC65 with NOTICES
The Matching System generally
would accept orders that are day orders,
limit orders, and orders for regular way
settlement.9 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
would be required to be submitted only
in those share sizes.10 The Exchange
believes that its quotations would
qualify as ‘‘automated quotations’’
under Rule 600(b)(3) of Regulation
NMS.11
Some of the order types accepted by
the Matching System that the Exchange
describes as more routine would
include immediate or cancel (‘‘IOC’’)
6 See infra Section II.C. for a more detailed
discussion.
7 17 CFR 242.600 et seq.
8 See infra note 27.
9 See proposed CHX Article 20, Rule 4(a)(1)–(3).
The proposed rules provide for certain exceptions
to these basic order eligibility requirements. For
example, the Matching System would also accept
immediate-or-cancel (‘‘IOC’’) market orders, and
would permit a ‘‘non-regular way cross order’’ to be
submitted for execution and non-regular way
settlement. See proposed CHX Article 20, Rules
4(a)(7) and 4(b)(13) and (16).
10 See proposed CHX Article 20, Rule 4(a)(4).
11 See 17 CFR 242.600(b)(3). The Exchange’s
proposed rules provide that each order submitted
to the Matching System must be a firm order and
cannot be identified as a ‘‘manual’’ quotation. See
proposed CHX Article 20, Rule 3(a). See also infra
note 54 and accompanying text.
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limit and market orders,12 fill or kill
(‘‘FOK’’) orders,13 sell short and short
exempt orders,14 reserve size orders,15
time in force orders 16 and cancel on
halt orders.17 The Matching System also
would accept several different types of
cross transactions, including a cross,18 a
cross with size,19 a cross with satisfy,20
12 IOC 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. See
proposed CHX Article 20, Rules 4(b)(12) (IOC
orders) and 4(b)(13) (IOC market orders).
13 See proposed CHX Article 20, Rule 4(b)(11).
14 See proposed CHX Article 20, Rule 4(b)(21)
(sell short orders) and Rule 4(b)(22) (short exempt
orders).
15 See proposed CHX Article 20, Rule 4(b)(20).
16 See proposed CHX Article 20, Rule 4(b)(23).
17 See proposed CHX Article 20, Rule 4(b)(3).
18 See proposed CHX Article 20, Rule 4(b)(4). A
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, for
securities listed on any exchange other than Nasdaq
(and for Nasdaq-listed securities, when Regulation
NMS is implemented in those issues), equal to or
better than the National Best Bid and Offer
(‘‘NBBO’’). A cross may represent interest of one or
more Exchange participants, trading for a
proprietary account. See infra note 43 for a
description of cross order executions.
19 See proposed CHX Article 20, Rule 4(b)(6). A
cross with size would be required to be 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, for securities listed on the New
York Stock Exchange (‘‘NYSE’’), the American
Stock Exchange (‘‘Amex’’), or any other exchange
except the NASDAQ Stock Market (‘‘Nasdaq’’) (and
for Nasdaq-listed securities, when Regulation NMS
is implemented in those issues), equal or better to
the NBBO, where the size of the cross transaction
is one round lot larger than the aggregate size of all
interest displayed on the Exchange at that price. At
such time as the Exchange disseminates a feed of
all displayable orders in the Matching System,
however, a cross with size order would be required
to be larger only than the largest order in the
Matching System at the relevant price. See
Amendment No. 2. A cross with size transaction
may represent interest of one or more participants
of the Exchange. See also infra note 43.
20 See proposed CHX Article 20, Rule 4(b)(5). A
cross with satisfy is designed to provide a
participant with a 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. A cross with satisfy
could 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 (i) would not be
eligible to satisfy existing bids or offers in the
Matching System at a price that is better than the
cross price (when the participant’s customer is on
the same side of the order as the participant), and
(ii) 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 (defined
elsewhere in the proposed rules) and the
participant’s customer has specifically agreed to
that outcome. See also infra note 44.
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a cross with yield,21 a midpoint cross,22
an ISO cross,23 an opening cross,24 and
a non-regular way cross.25
The Matching System also would
accept several order types that are
related to Regulation NMS,26 and that
would become effective on the Trading
Phase Date of Regulation NMS.27 For
example, the Matching System would
accept benchmark orders that meet the
requirements of Rule 611(b)(7) of
Regulation NMS.28 The Matching
System would also accept different
types of intermarket sweep orders
21 See proposed CHX Article 20, Rule 4(b)(7). A
cross with yield 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. See also infra note 45.
22 See proposed CHX Article 20, Rule 4(b)(15). A
midpoint cross would execute at the midpoint
between the NBBO. However, 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.
23 See proposed CHX Article 20, Rule 4(b)(14),
added by Amendment No. 2. An ISO cross would
be defined as any type of cross order marked as
required by Regulation NMS to be executed without
taking any of the actions required by the Exchange’s
relevant rules to prevent a trade-through.
24 See proposed CHX Article 20, Rule 4(b)(17).
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. See also
proposed CHX Article 20, Rule 8(c)(2).
25 See proposed CHX Article 20, Rule 4(b)(16). A
non-regular way cross would be designated for nonregular way settlement. 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.
26 17 CFR 242.600 et seq.
27 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 of
Regulation NMS).
28 See 17 CFR 242.611(b)(7); see also CHX
proposed Article 20, Rule 4(b)(2). A benchmark
order, as defined in the proposed rules, would be
an order submitted by an institutional broker, and
could be executed at any price, without regard to
the protected NBBO. A benchmark order could
represent interest of one or more Exchange
participants.
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jlentini on PROD1PC65 with NOTICES
(‘‘ISOs’’), such as BBO ISOs,29 outbound
ISOs 30 and price-penetrating ISOs.31
In general, the Matching System
would accept only orders that comply
with the sub-penny restrictions set forth
in Rule 612 of Regulation NMS.32
However, contingent upon the
Commission granting the necessary
exemptive relief from Rule 612, the
proposed rules would permit any type
of cross order to be submitted to the
Matching System in a sub-penny
increment as small as $0.000001,
provided that no type of cross, except
midpoint crosses, non-regular-way
crosses and cross with size orders,
would be permitted to execute at a price
less than $.01 better than any currently
displayed same-sided interest available
on the Matching System (or $.0001
better when the order is priced under
$1.00).33
Finally, the Matching System would
accept ‘‘do-not-display’’ and ‘‘do-notroute orders.’’ A do-not-display order
would be an order, for at least 1,000
shares when entered, that would not be
displayed in whole or in part, but that
would remain eligible for execution
within the Matching System.34 A donot-route order would be executed or
displayed within the Matching System
and could not be routed to another
market center.35
29 See proposed CHX Article 20, Rule 4(b)(1).
BBO ISOs would execute against orders at the
Exchange’s BBO, without regard to whether the
execution would trade through another market’s
protected quotation. 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
displayed in the Matching System, without regard
to whether that display would lock or cross another
market center. See proposed CHX Article 20, Rule
6(c)(3).
30 An outbound ISO would allow an Exchange
participant to ask the Exchange to execute an order
on the Exchange while simultaneously routing ISOs
to those other markets to execute against their
protected quotations. Outbound ISOs would be
executed against any eligible orders in the Matching
System (including any reserve size or other
undisplayed orders). Other than the routing of ISOs
to other market centers, no action would be taken
to prevent an improper trade-through. See proposed
CHX Article 20, Rule 4(b)(18).
31 See proposed CHX Article 20, Rule 4(b)(19). 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.
32 17 CFR 242.612.
33 See proposed CHX Article 20, Rule 4(a)(7)(b).
See also Amendment No. 2.
34 See proposed CHX Article 20, Rule 4(b)(9).
35 See proposed CHX Article 20, Rule 4(b)(10). 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 be
deemed to have been received with a ‘‘do not route’’
condition because these orders either are
immediately executed in the Matching System or
cancelled.
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2. Ranking and Display of Orders
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
order.36 Specifically, orders received by
the Matching System would be ranked
as follows: (i) 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; (ii) 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; and (iii) 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.37
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. For display purposes, 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.38
3. Automatic Execution
Incoming orders generally would be
matched against 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.39 If an order could not
36 See proposed CHX Article 20, Rule 8(b). Orders
sent to an institutional broker for handling would
not have any priority within the Matching System
unless and until they are received by the Matching
System. Id.
37 Id., proposed Rule 8(b)(1)–(3). The refreshed
displayed portion of a reserve-size order would
receive a new ranking based on the time it was
refreshed, with any remaining undisplayed portion
retaining the ranking at which it was originally
received. Id., proposed Rule 8(b)(4). A change to an
order’s size or price, or its displayed portion, could
impact its ranking within the Matching System. A
change to the display instructions associated with
an order would need to be submitted as a new order
and would be ranked based on the time the new
order was received. Id., proposed Rule 8(b)(5). See
also Amendment No. 2.
38 Id., proposed Rule 8(b)(6). For execution
purposes, however, all orders would retain their
rankings as described above.
39 See proposed CHX Article 20, Rule 8(d)(1).
This general rule would be subject to certain
exceptions specifically set forth in proposed CHX
Article 20, Rule 8(e), and subject to the provisions
relating to the prevention of trade-throughs in
proposed CHX Article 20, Rule 5.
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59565
be immediately matched or matched in
full when received, and it is not
designated as an order type that should
be immediately cancelled,40 it or its
residual portion would be placed in the
Matching System and ranked.41
The proposed rules describe certain
order types that would be subject to
specific executions within the Matching
System.42 Such order types include
cross and cross with size orders,43 cross
with satisfy orders,44 cross with yield
orders,45 sell short orders,46 do-not40 See proposed CHX Article 20, Rules 4(b)(11)
through (13). Orders that would be immediately
cancelled, if not executed, include FOK orders and
IOC limit and market orders.
41 See proposed CHX Article 20, Rule 8(d)(2); see
also supra note 37 and accompanying text.
42 See proposed CHX Article 20, Rule 8(e).
43 See proposed CHX Article 20, Rule 8(e)(1).
Cross and cross with size orders would be
automatically executed if they meet the
requirements for such order types, and would be
immediately and automatically cancelled if they do
not meet these requirements.
44 See proposed CHX Article 20, Rule 8(e)(4). In
executing cross with satisfy orders, 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. 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
Regulation 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. See also
supra note 20.
45 See proposed CHX Article 20, Rule 8(e)(2). A
cross with yield order would be automatically
executed by matching the participant as principal
against the customer order if the customer order
that is part of a cross with yield order is at a price
better than the currently displayed best bid or offer
in the Matching System; 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. If
the customer order that is part of a cross with yield
order is not eligible for an immediate execution
because it is not priced better than the currently
displayed bid or offer in the Matching System, the
cross with yield order would be immediately and
automatically cancelled. See also supra note 21.
46 See proposed CHX Article 20, Rule 8(e)(5). 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’’) under the Act and Regulation SHO. When
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display orders,47 and inbound ITS
commitment or linkage plan orders.48
The proposed rules also describe the
handling of orders in locked and
crossed markets.49
jlentini on PROD1PC65 with NOTICES
4. Preventing Trade-Throughs
An inbound order for at least one
round lot would not be eligible for
execution on the Exchange if its
execution would cause an improper
trade-through, both prior to and
following the Trading Phase Date of
Rule 611 of Regulation NMS.50 The
proposed rules provide that the
Exchange will follow a series of tradethrough policies and procedures in
determining whether a trade on the
Exchange would create an improper
trade-through.51 These procedures
include clock synchronization practices,
as well as plans for applying the
exceptions to Rule 611 of Regulation
NMS. For example, the Exchange’s rules
contemplate using the self-help
exception in Rule 611(b)(1) of
Regulation NMS.52 Further, the
Exchange would automatically place an
appropriate modifier on trades executed
pursuant to an exemption from, or
exception to, Rule 611 of Regulation
NMS in accordance with specifications
approved by the operating committee of
the relevant national market system
plan for an NMS stock. If a trade is
executed pursuant to both the
intermarket sweep order exception of
Rule 611(b)(5) or (6) of Regulation NMS
and the self-help exception of Rule
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 re-priced (without violating its limit
price) to the next available price at which it can be
executed or displayed. If the Matching System
cannot determine an appropriate price at which to
execute or display the order, the order would be
automatically cancelled. See Amendment No. 2.
47 See proposed CHX Article 20, Rule 8(e)(6). A
do-not-display order 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.
48 See proposed CHX Article 20, Rule 8(e)(7).
49 See proposed CHX Article 20, Rule 6 and
proposed CHX Article 20, Rule 5, Interpretation and
Policy .01(e).
50 See proposed CHX Article 20, Rule 5. An
inbound order for at least one round lot would not
be eligible for execution on the Exchange if its
execution would cause an improper trade-through
of another ITS market or if, when Regulation NMS
is implemented for a security, the execution of all
or a part of the order would be improper under Rule
611 of Regulation NMS. 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.
51 See proposed CHX Article 20, Rule 5,
Interpretation and Policy .01.
52 See 17 CFR 242.611(b)(1); see also proposed
CHX Article 20, Rule 5, Interpretation and Policy
.01(d).
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611(b)(1) of Regulation NMS, the trade
would be identified as executed
pursuant to the intermarket sweep order
exception.53 The proposed rules also set
forth the procedures that the Exchange
would use to confirm that its own bids
and offers qualify as automated
quotations and, if they do not qualify as
automated quotations, how the
Exchange will identify such quotations
as manual.54
5. Order Routing
The proposed rules also contain
provisions governing the routing of
orders to other markets when execution
in the Matching System would cause an
improper trade-through.55 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 orders or
commitments necessary to satisfy the
bids or offers of other markets (‘‘routing
services’’). Otherwise, any inbound
order for at least a round lot is not
eligible for execution on the Exchange if
its execution would cause an improper
trade-through.56
The Exchange proposes to provide
these routing services pursuant to the
terms of three separate agreements, to
the extent that they are applicable to a
specific routing decision: (i) An
agreement between the Exchange and
each participant on whose behalf orders
will be routed; (ii) 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; and (iii) an agreement
between the Exchange and the specified
third-party broker-dealer pursuant to
which the third-party broker-dealer
would agree to provide routing
connectivity to other markets and serve
as a ‘‘give-up’’ for the Exchange’s
participants in other markets. In
providing the routing services, the
Exchange would use its own systems to
determine when, how, and where orders
(or commitments) are routed away to
other markets.57 In addition, the
Exchange will establish and maintain
procedures and internal controls
53 See proposed CHX Article 20, Rule 5,
Interpretation and Policy .01(h). See also
Amendment No. 2.
54 See proposed CHX Article 20, Rule 5,
Interpretation and Policy .02. Specifically, the
Exchange would send test IOC orders to the
Matching System to make this determination. See
also supra, note 11 and accompanying text.
55 See proposed CHX Article 20, Rule 5,
Interpretation and Policy .03.
56 See proposed CHX Article 20, Rule 5(a).
57 Id.
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reasonably designed to adequately
restrict the flow of confidential and
proprietary information between the
Exchange (including its facilities) and
the third-party broker-dealer, and, to the
extent the third-party broker-dealer
reasonably receives confidential and
proprietary information, that adequately
restrict the use of such information by
the third party broker-dealer to
legitimate business purposes necessary
to provide routing connectivity and to
serve as a ‘‘give-up.’’ 58
6. Locking and Crossing Quotations
With certain exceptions, Exchange
participants would be required to
reasonably avoid displaying, and refrain
from engaging in a pattern or practice of
displaying, any quotations that lock or
cross a protected quotation.59 An order
would not be eligible for display on the
Exchange if its display would
improperly lock or cross the ITS best
bid or offer or, as of the Trading Phase
Date of Regulation NMS for a security,
if its display would constitute a locking
or crossing quotation.60 These otherwise
locking or crossing orders would either
be automatically routed to another
appropriate market or, if designated as
‘‘do not route,’’ automatically cancelled.
B. Market Makers
The proposed rules in Article 16 set
forth the responsibilities of a participant
that registers as a market maker on the
Exchange.61 In particular, a market
maker would be required to engage in a
course of dealings for its own account
to assist in the maintenance, to the
extent reasonably practicable, of fair and
58 See
Amendment No. 2, supra note 5.
proposed CHX Article 20, Rule 6. The
exceptions are provided when: (i) The locking or
crossing quotation was displayed at a time when
the other trading center was experiencing a failure,
material delay, or malfunction of its systems or
equipment; (ii) the locking or crossing quotation
was displayed at a time when a protected bid was
higher than a protected offer in the NMS stock; or
(iii) the Exchange participant displaying the locking
or crossing quotation simultaneously routed an
intermarket sweep order to execute against the full
displayed size of any locked or crossed protected
quotation.
60 See proposed CHX Article 20, Rule 6.
61 An Exchange-registered market maker would
be permitted to trade only on a proprietary basis
and would not be permitted to handle any agency
orders on the Exchange. To the extent that a
participant firm wants to act as an Exchangeregistered market maker and also handle orders
from customers outside the facilities of the
Exchange, it would be required to create and strictly
enforce information barrier procedures as described
infra at note 64 and accompanying text. Since
Exchange-registered market makers are not
permitted to handle agency orders, the Matching
Engine will reject any cross order instructions
entered by a market maker in its market maker
trading account. See proposed CHX Article 16, Rule
1, Interpretation and Policy .02. See also
Amendment No. 2.
59 See
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orderly markets on the Exchange. A
market maker’s responsibilities would
specifically include: (1) Using
automated systems to maintain a
continuous two-sided quote, for at least
a round-lot, in each of the securities in
which it is registered; 62 (2) maintaining
adequate minimum capital; and (3)
meeting specific quotation or trade
requirements, with respect to its
dealings on the Exchange, over the
course of each calendar month.63 In
addition, a market maker that is
registered as a market maker solely on
the Exchange and engages in other
business activities (or that is affiliated
with a broker or dealer that engages in
other business activities) would be
required to establish information
barriers that prevent the market maker
from using material, non-public
information or information about
customer order flow handled by the firm
in its trading activities.64
C. Institutional Brokers
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Participant firms for which the
Exchange is the designated examining
authority could register with the
Exchange as institutional brokers.65
Institutional brokers would be deemed
to be participants operating on the
Exchange, although they would not
effect transactions from a physical
trading floor (since the Exchange will no
longer have a physical trading floor) and
could trade from any location. A
customer order would be deemed to be
on the Exchange when received by an
institutional broker, but would not have
priority in the Matching System until it
is entered into the system.
Institutional brokers would be
required to: (1) Enter all orders received
for execution on the Exchange into an
automated system to provide an
electronic record of their order handling
practices; (2) handle orders with an
electronic system acceptable to the
Exchange that integrates their onexchange activities with the Matching
System and their trading activities in
other market centers; and (3) maintain
separate accounts for handling agency
transactions, principal transactions, and
62 A market maker’s continuous two-sided quotes
would be required to be at prices which are
reasonably related to the prevailing market price of
the security. See CHX Article 16, Rule 8,
Interpretation and Policy .01.
63 See proposed CHX Article 16, Rule 8(a)–(c).
64 See proposed CHX Article 16, Rule 9.
65 See proposed CHX Article 17, Rule 1. Each
individual that would be authorized to effect trades
on behalf of the firm would be required to
separately register as an institutional broker
representative. See proposed CHX Article 17, Rule
1, Interpretation and Policy .02.
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transactions involving errors.66
Institutional brokers would also be
required to maintain required records of
their trading activities.67 An
institutional broker would be required
to use due diligence to execute a market
order at the best price available; to use
due diligence to execute a limit order at
or better than the limit price, if
available; and to use brokerage
judgment in the execution of a not held
order.68
Institutional brokers would be
required to use reasonable efforts to
report all transactions that are not
effected through the Exchange’s
Matching System to the Exchange
within 10 seconds of the trade.69 If an
institutional broker executes an order
outside of the Matching System, it
would be required to use the Exchange’s
Brokerplex system to determine whether
a trade would constitute a trade-through
and create an electronic record that such
validation had taken place.70 In general
terms, the Brokerplex system would
allow an institutional broker to input
the symbol for a security and pull up a
window that includes a snapshot of the
Matching System BBO and the NBBO.
The institutional broker then could
report a trade that is consistent with the
orders in the Matching System and the
NBBO. An institutional broker that
initiates the use of this functionality to
report a proprietary trade against a
customer order would be required to
complete the transaction report (without
cancelling out of the functionality),
unless the institutional broker had
mistakenly input the symbol for the
wrong security. The transaction also
could be cancelled pursuant to CHX
rules relating to cancellations of
transactions, clearly erroneous
transactions and systems disruptions
and malfunctions.71
Unless a customer specifically
requests otherwise, an institutional
broker would be required to clear the
Matching System before sending an
order to another market for execution.72
66 See proposed CHX Article 17, Rule 3(a) through
Rule 3(c). The Commission recently approved, and
the Exchange has implemented, a proposed rule
change regarding requirements for entering orders
into an electronic system to permit the Exchange to
more readily surveil broker order handling
activities. See CHX Article 11, Rule 3; Securities
Exchange Act Release No. 53772 (May 8, 2006), 71
FR 27758 (May 12, 2006).
67 See proposed CHX Article 17, Rule 3(f).
68 See proposed CHX Article 17, Rule 3(d).
69 See proposed CHX Article 17, Rule 3(e).
70 See CHX Article 17, Rule 3, Interpretation and
Policy .03.
71 See id.
72 See proposed CHX Article 20, Rule 7. Any
customer directives for special handling of orders
would have to be documented and reported to the
Exchange.
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59567
The proposed rules provide exceptions
to this requirement for: (1) Outbound
ITS commitments or ISOs that are being
sent to another market to satisfy its
displayed bid or offer;73 and (2)
customer orders that are being sent to
another market that could not be
executed in the Matching System.74
D. Other Rule Changes
Proposed Article 9, Rule 17, based on
an existing Exchange rule prohibiting
participants from trading ahead of
customer orders, would include a
provision confirming that a participant
would be deemed to be holding an
unexecuted customer order when that
order has been sent to the Matching
System, but remains unexecuted.75
The Exchange proposes to adopt a
sponsored access rule, which would
allow Exchange participants to provide
non-participant broker-dealers with
access to the Exchange.76 Under the
proposed rule, this type of sponsored
access could be provided so long as the
participant sponsoring access, the nonparticipant broker-dealer, and the
Exchange entered into appropriate
agreements confirming basic
information about the parties’ roles and
responsibilities.77
In addition to the changes described
above, the Exchange has also proposed
revisions to virtually every other
chapter of its rules. These changes are
generally designed to remove references
to the physical trading floor, delete
obsolete provisions and account for the
new automated trading model, as well
as to better streamline and organize the
rules. For example, the CHX proposes to
delete rules relating to specialists and
access to the trading floor and adopt
rules that contemplate remote access to
the Exchange’s automated trading
systems. In addition, changes are being
proposed to rules relating to: hours of
trading, trading halts, cancelling
transactions, business conduct,
disciplinary matters and trial
proceedings, arbitration, Exchange
emergency suspension authority;
committees; trading permits; limitation
of liability; voting designees;
registration; fingerprinting; reporting
transactions; riskless principal
73 See
proposed CHX Article 20, Rule 7(c).
proposed CHX Article 20, Rule 7(d).
75 See proposed CHX Article 9, Rule 17,
Interpretation and Policy .05. The proposed rule
would also confirm that a participant would not be
in violation of the ‘‘trading ahead’’ rule if it satisfied
bids and offers in other markets in accordance with
the requirements for a ‘‘cross with satisfy order.’’
See proposed CHX Article 9, Rule 17, Interpretation
and Policy .06; see also supra note 20 (discussing
cross with satisfy orders).
76 See proposed CHX Article 5, Rule 3.
77 See id.
74 See
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transactions; use of a customer’s giveup; books and records; firm supervision;
ITS; clearance and settlement; and
listing on the Exchange.
E. Amendment No. 2
jlentini on PROD1PC65 with NOTICES
On September 29, 2006, the Exchange
filed Amendment No. 2 to the proposed
rule change, which made certain
revisions to the original proposal, as
amended by Amendment No. 1. In
Amendment No. 2, the Exchange
described its proposed phase-in plan for
the new trading model.78 In
Amendment No. 2, the Exchange also
provided additional discussion and
clarification on certain aspects of the
proposal.
The Exchange also added a discussion
of how the Exchange believes that the
rules of the proposed new trading model
will be consistent with Section 11(a) of
the Act.79 The Exchange stated that it
believes that the proposed Matching
System meets the requirements of Rule
11a2–2(T) under the Act,80 known as
the ‘‘effect versus execute’’ rule, which
provides an exemption from the
prohibition of Section 11(a). Further, the
Exchange stated that it believes that the
proposal does not raise any of the policy
concerns that Congress sought to
address in Section 11(a) of the Act
including, specifically, the time and
place advantages that members on
exchange floors might have over nonmembers off the floor and the general
public.
In Amendment No. 2, the Exchange
also made certain changes to the rule
text reflecting modifications in how the
Matching System will operate.
Specifically, the Exchange modified the
proposed rules to: (1) Amend the
definition of a ‘‘cross with size’’ order; 81
(2) confirm that the Matching System
will evaluate most cross orders to see if
they meet the ‘‘cross with size’’
definition and, if so, will execute them
78 The Exchange stated that it plans to phase in
the new trading model as follows: (i) Beginning the
week of October 2, 2006, the Exchange will begin
to transition Nasdaq-listed securities to the
Matching System; (ii) during the week of October
16, 2006, the Exchange will begin to transition all
other securities that are not currently traded by
specialists to the Matching System; and (iii) by
early November 2006, the Exchange will begin to
transition securities currently traded by the
Exchange’s specialists to the Matching System. The
Exchange stated that, in the near future, it will
provide notice to participants of the exact dates for
transition of specific securities.
79 15 U.S.C. 78k(a).
80 17 CFR 240.11a2–2(T).
81 See proposed CHX Article 20, Rule 4(b)(6)
(requiring a cross with size to size out all of the
displayed interest at a price, but providing that,
once the CHX is disseminating a book feed, a cross
with size would only be required to size out the
largest displayed order).
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as crosses with size; 82 (3) provide that,
when the Matching System lacks
sufficient information to determine the
appropriate price at which a sell short
order could be displayed or executed,
the Matching System will automatically
cancel the order; 83 (4) confirm that
cross orders can be submitted as ISOs; 84
(5) remove references to functionality
that is not being built; 85 and (6) confirm
that a participant cannot change a
‘‘display’’ instruction for an order, but
must submit a new order with a new
display instruction.86 In addition, the
Exchange revised the proposed rules to
confirm the circumstances when the
Matching System would display quotes
that would lock or cross the protected
quotes of other markets 87 and to clarify
that the Matching System will trade in
increments supported by the ITS or
Regulation NMS linkage plan.88 The
Exchange also clarified how a trade
should be identified when it is executed
pursuant to both the intermarket sweep
order exception of Rule 611(b)(5) or (6)
of Regulation NMS and the self-help
exception of Rule 611(b)(1) of
Regulation NMS.89
In Amendment No. 2, the Exchange
also made certain changes intended to
clarify the meaning of the proposed
rules. These changes include a change
in the definition of NBBO to confirm
that, as of the Trading Phase Date of
Regulation NMS, this term relates only
to protected bids and offers; 90 the
addition of language that confirms that
non-regular way crosses can execute
within a penny of other orders in the
Matching System; 91 and a change that
notes that, in the last ‘‘refresh’’ of a
reserve size order, the number of shares
may be less than the original number of
displayed shares because that is all that
is left.92 Other similar changes clarify
the execution of benchmark orders; 93
82 See
proposed CHX Article 20, Rule 4(b)(6).
proposed CHX Article 20, Rule 8(e)(5).
84 See proposed CHX Article 20, Rule 4(b)(14).
85 See proposed CHX Article 20, Rule 4(a)(7)(b)
(removing a reference to an order that executes at
the midpoint of the NBBO, because this
functionality is not being built at this time).
86 See proposed CHX Article 20, Rule 8(b)(5).
87 See proposed CHX Article 20, Rule 6(d).
88 See proposed CHX Article 20, Rule 4(a)(7)(d);
see also proposed CHX Article 20, Rule 4(a)(7)(e).
89 See proposed CHX Article 20, Rule 5,
Interpretation and Policy .01(h).
90 See proposed CHX Article 1, Rule 1(o).
91 See proposed CHX Article 20, Rule 4(a)(7)(b)
(recognizing, as already expressed in the definition
of this type of order, that non-regular way cross
orders execute without regard to orders in the
Matching System, because all orders in the
Matching System are for regular-way settlement).
92 See proposed CHX Article 20, Rule 4(b)(20).
93 See proposed CHX Article 20, Rule 4(b)(2)
(confirming that benchmark orders must be
executed in increments permitted by Article 20,
83 See
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confirm the handling of BBO ISO
orders; 94 and state, with regard to
relevant provisions, that they take effect
on the Trading Phase Date of Rule 611
of Regulation NMS.95
In Amendment No. 2, the Exchange
also made changes to Article 16
governing market makers. The Exchange
revised the rules to prohibit an
individual from registering both as a
market maker trader and an institutional
broker representative.96 The Exchange
also modified the rules to provide that
market makers may only trade on a
proprietary basis on the Exchange, and
if a market maker handles agency orders
off of the Exchange, it must create and
enforce information barrier procedures
pursuant to CHX Article 16, Rule 9.97
Pursuant to an exemption recently
issued by the Commission,98 the
Exchange proposed further provisions
in Amendment No. 2 to permit
‘‘qualified contingent trades’’ to be
executed on the Exchange.99 The
Exchange asserts that these trades
would meet the requirements of the
Commission’s order exempting from
Rule 611(a) any trade-throughs caused
by the execution of an order involving
one or more NMS stocks that are
components of a ‘‘qualified contingent
trade,’’ as defined in the Commission’s
exemptive order.100
The Exchange also added provisions
requiring it to establish and maintain
information barriers to restrict the flow
of information between the Exchange
(including its facilities) and the thirdparty broker-dealer providing
connectivity to other trading centers,
and, to the extent such third-party
broker-dealer receives such information,
that adequately restrict the use of such
Rule 4(a)(7)(b)). The Exchange also elaborated on its
reasoning in proposing that benchmark orders only
be permitted to be submitted to the Matching
System by institutional brokers, and noted that
other participants seeking to execute benchmark
orders on the Exchange could do so through an
institutional broker.
94 See proposed CHX Article 20, Rule 4(b)(1)
(confirming that BBO ISO orders will be displayed
in the circumstances set out in the rule because the
participant routing the order to the Matching
System has already satisfied the quotations of other
markets as required by Article 20, Rule 6(c)(3)).
95 See, e.g., proposed CHX Article 20, Rules
4(b)(1), (2), (14), (18) and (19); see also proposed
CHX Article 1, Rule 1(y) (defining the ‘‘Trading
Phase Date’’ as February 5, 2007).
96 See proposed CHX Article 16, Rule 1,
Interpretation and Policy .01.
97 See proposed CHX Article 16, Rule 1,
Interpretation and Policy .02.
98 See Securities Exchange Act Release No. 54389
(August 31, 2006), 71 FR 52829 (September 7, 2006)
(‘‘Qualified Contingent Trade Exemptive Order’’).
99 See proposed CHX Article 1, Rule 2(bb) and
proposed CHX Article 20, Rule 5, Interpretation and
Policy .01(i).
100 See Qualified Contingent Trade Exemptive
Order, supra note 98.
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information by the third party brokerdealer to legitimate business purposes
necessary to provide routing
connectivity and to serve as a ‘‘give-up.’’
Further, in Amendment No. 2, the
Exchange revised its rule text to reflect
recent changes made to Exchange rules
by other proposed rule changes that
have been recently approved by the
Commission.101
III. Discussion and Commission
Findings
After careful review, 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 102 and,
in particular, the requirements of
Section 6 of the Act 103 and the rules
and regulations thereunder. The
Commission finds that the proposed
rule change, as amended, is consistent
with Section 6(b)(5) of the Act,104 which
requires that the rules of an exchange be
designed, among other things, to
prevent fraudulent and manipulative
acts and practices, 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.
jlentini on PROD1PC65 with NOTICES
A. The Matching System
The Matching System would allow
participants to route orders to it from
any location for possible immediate
execution through any communications
line approved by the Exchange.105 The
adoption of the Exchange’s proposed
rules, which feature the Matching
System as the core facility of the
Exchange, will fundamentally change
the Exchange’s current market structure
from a substantially floor-based auction
market to an all-electronic one. The
Commission believes that by allowing
electronic access to Exchange liquidity,
the proposed new model should help
perfect the mechanism of a free and
open market by providing investors
101 In particular, the Exchange revised the
proposed rule text to reflect changes to the
Exchange’s disciplinary rules made in SR–CHX–
2005–06, see Securities Exchange Act Release No.
54437 (September 13, 2006), 71 FR 55037
(September 20, 2006); and to reflect changes to the
Exchange’s rules made in SR–CHX–2006–23,
confirming that each participant firm only needs
one trading permit to conduct business on the
Exchange, see Securities Exchange Act Release No.
54494 (September 25, 2006).
102 The Commission has considered the proposed
rule’s impact on efficiency, competition and capital
formation. 15 U.S.C. 78c(f).
103 15 U.S.C. 78f.
104 15 U.S.C. 78f(b)(5).
105 See proposed CHX Article 20, Rule 8(a)(1).
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with a more efficient mechanism to
have their orders executed on the
Exchange.
The Commission also believes that the
Exchange’s new trading model should
facilitate securities transactions by
providing investors with faster and
more efficient access to the trading
interest reflected in the Exchange’s
published quotation, as well as interest
away from the Exchange BBO. Finally,
the Commission believes that the
Exchange’s proposal should enhance the
opportunity for a customer’s order to be
executed without dealer participation,
consistent with the goals of Section 11A
of the Act.106
1. Eligible Orders and Order Types
Under the proposed rule change,
participants would be permitted to
submit orders to the Matching System
that are day orders, limit orders, and
orders for regular way settlement (as
well as certain other excepted types of
orders such as IOC market orders and
non-regular way crosses) and generally
would be permitted to submit orders as
round lots, odd lots, or mixed lots.107
The proposed rules require that orders
submitted to the Matching System must
meet the requirements of Rule 612 of
Regulation NMS, unless an exemption
therefrom applies.108 As such, except
for cross orders under certain
circumstances as discussed below,109
orders priced at or above $1.00 could
not be submitted to the Matching
System in increments less than $0.01,
and orders priced less than $1.00 could
not be submitted to the Matching
System in increments less than
$.0001.110 The Commission believes
that these order eligibility requirements
are consistent with the Act.
The Exchange proposes to permit the
Matching System to accept a wide
variety of order types. These order types
include: immediate or cancel limit and
market orders, fill or kill orders, sell
short and short exempt orders, reserve
size orders, time in force orders, cancel
on halt orders, do-not-display orders,
do-not-route orders, various types of
cross orders, and various types of
ISOs.111 Many of these order types exist
in the Exchange’s current rules set,
while others have been proposed
exclusively for use in the new trading
model or for use as of the Trading Phase
Date of Regulation NMS. The
Commission believes that these order
types should provide Exchange
participants greater flexibility in
reaching their trading and investment
objectives. The Commission notes that a
number of the proposed order types will
have different definitions prior to and
following the Trading Phase Date of
Regulation NMS, which should enable
users to make use of the trading
strategies of such order types
immediately, as well as after the
Trading Phase Date.
As noted, the Exchange has proposed
a number of cross order types for use in
the Matching System. The Commission
notes that the cross order is already
permitted in the Exchange’s electronic
book.112 A cross order would be
immediately executed in the Matching
System if it is priced better than the
Matching System’s displayed BBO and,
for securities listed on any exchange
other than Nasdaq (and for Nasdaqlisted securities, as of the Trading Phase
Date of Regulation NMS), equal to or
better than the NBBO.113 Similarly, a
form of the cross with size order is
already permitted in the Exchange’s
electronic book.114 Under the proposed
rules, a cross with size will be required
to be larger than the aggregate size of all
displayable orders displayed on the
Matching System at the cross price,
consist of at least 5,000 shares, and have
a value of $100,000. The Commission
notes that it has previously approved a
similar rule at another exchange.115
The Exchange is also proposing
several completely new cross order
types that would be accepted by the
Matching System, such as cross with
satisfy 116 and cross with yield
orders.117 The Commission believes that
these cross orders may provide an
efficient means to allow participants to
effect cross transactions in the Matching
System, consistent with the Exchange’s
other priority and trade-through rules,
in circumstances where a cross order
would otherwise be unable to be
executed and would be cancelled. A
cross with satisfy order would contain
an instruction to execute orders already
displayed in the Matching System at
their limit prices (up to a specified
number of shares) to the extent
necessary to allow the cross transaction
to occur or to route outbound orders or
commitments to other market centers to
the extent necessary to prevent an
112 See
106 See
Section 11A(a)(1)(C) of the Act, 15 U.S.C.
78k–1(a)(1)(C).
107 See supra notes 9–10 and accompanying text.
108 17 CFR 242.612.
109 See infra note 124 and accompanying text.
110 See proposed CHX Article 20, Rule 4(a)(5).
111 See supra Section II.A.1.
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current CHX Article XXA, Rule 2.
proposed CHX Article 20, Rule 4(b)(4) and
supra note 18.
114 See current CHX Article XXA, Rule 2.
115 See Rules of the National Stock Exchange,
Inc., Rule 11.12.
116 See supra note 20.
117 See supra note 21.
113 See
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improper trade-through.118 Once the
satisfying execution has occurred, the
cross order would be executed at a price
that is better than the Matching
System’s displayed BBO and, for
securities listed on any exchange other
than Nasdaq (and for Nasdaq-listed
securities, as of the Trading Phase Date
of Regulation NMS), equal to or better
than the NBBO.
The cross with yield order is similar
to the cross with satisfy, and would
contain 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.119 The cross order
would then 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 any exchange
other than Nasdaq (and for Nasdaqlisted securities, as of the Trading Phase
Date of Regulation NMS), equal to or
better than the NBBO.
The Matching System would also
accept mid-point cross orders, which
would be executed at the midpoint of
the NBBO.120 The Commission notes
that this order type has been previously
approved for other exchanges.121 The
Exchange also proposes to permit a nonregular way cross order, which would
be for non-regular way settlement and
would execute without regard to the
NBBO or any other orders in the
Matching System.122 The Commission
notes that the Exchange has represented
that participants can currently execute
orders for non-regular way settlement in
the Exchange’s electronic book and on
the floor of the Exchange,123 but this
cross order type would be the only
means to effectuate this type of
transaction within the Matching System.
Contingent upon the Exchange
receiving exemptive relief from the
Commission, the Exchange proposes to
allow all cross orders to be submitted to
the Matching System in sub-penny
increments as small as $.000001,
regardless of their price.124 Although
participants would be permitted to
submit crosses in sub-penny
increments, the Exchange proposes that
cross orders (except for a midpoint
118 See
proposed CHX Article 20, Rule 4(b)(5).
proposed CHX Article 20, Rule 4(b)(7).
120 See supra note 22.
121 See, e.g., NYSE Arca Equities Rule 7.31(y).
122 See supra note 25.
123 See current CHX Article XX, Rule 9; CHX
Article XXA, Rule 2(c)(5).
124 See proposed CHX Article 20, Rule 4(a)(7)(b)
(stating that the provision ‘‘shall take effect upon
the granting of exemptive relief by the
Commission’’).
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cross, non-regular-way cross or cross
with size) would be required to be
priced at least $.01 better than any order
on the same side of the Matching
System (or, for orders priced less than
$1.00, at least $.0001 better than any
order on the same side of the Matching
System).
The Commission believes that the
proposed rules relating to cross
transactions are consistent with the Act
and offer participants flexibility in
executions which meet the specified
requirements of each type of cross. In
addition, the Commission notes that
proposed CHX Article 9, Rule 17, which
restricts trading ahead of customer
orders, would apply to the cross order
types, except as noted in Interpretation
and Policy .06 of that rule with respect
to cross with satisfy orders.125
The Exchange also proposes to permit
the Matching System to accept several
order types modeled on the exceptions
in Rule 611(b) of Regulation NMS. The
Matching System would accept various
ISOs, which would allow the Exchange
to immediately execute such orders
without regard to other markets’
protected quotations, as contemplated
by Regulation NMS.126 The Commission
believes that these proposed order types
are consistent with the Act, and notes
that these provisions will not become
effective until the Trading Phase Date of
Regulation NMS.
The Matching System would also
accept do-not-display 127 and do-notroute orders.128 The do-not-display
order could be partially or wholly
undisplayed. Such an order would
remain eligible for execution in the
Matching System, but would be ranked
behind displayed orders and behind the
undisplayed portions of reserve size
orders. This order type gives a
participant the ability to keep trading
interest unseen, but at the same time
allows the order to remain eligible for
execution while being ranked behind
any displayed interest in the Matching
System. As its name implies, a do-notroute order is an order that could not be
routed to another market. A do-notroute order would be immediately
cancelled if its execution would
improperly trade through the ITS BBO
or another market’s protected
quotations.129 The Commission believes
that these proposed order types may
offer participants greater flexibility in
125 See
proposed CHX Article 9, Rule 17.
supra notes 29–31.
127 See supra note 34 and accompanying text.
128 See supra note 35 and accompanying text.
129 See proposed CHX Article 20, Rule 5(a).
126 See
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the handling of their orders and are
consistent with the Act.
2. Ranking and Display of Orders
Under the proposed rule change, all
orders received by the Matching System
would be ranked by price, time of
receipt, and any display instructions.130
No distinction would be made with
regard to agency orders and professional
or proprietary orders for priority
purposes.131 Orders would be displayed
to the public when they constitute the
best round-lot bid or offer in the
Matching System for a security.
Generally, incoming orders would be
matched against 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.132 However, orders
would be subject to the proposed
provisions prohibiting improper tradethroughs,133 and certain order types
would be subject to specific executions
within the Matching System.134 Unless
the terms of the order direct otherwise,
any order that could not be immediately
executed or executed in full would be
ranked in the Matching System in
accordance with the Exchange’s order
priority rules.135 In addition, the
proposed rules provide that, unless a
customer specifically requests
otherwise, institutional brokers would
be required to clear the Matching
System before routing an order to
another market, subject to certain
exceptions.136
The Commission believes that the
proposed rules relating to ranking,
display and execution of orders are
consistent with the Act.137 In particular,
the Commission believes that the
priority rules and automatic execution
functionality should result in a more
efficient market and promote
competition in the national market
system. Further, the Commission
believes that requiring institutional
brokers to clear the Matching System
130 See
supra notes 36–37 and accompanying text.
Commission has approved similar priority
rules for the CHX’s electronic book. See Securities
Exchange Act Release No. 52094 (July 21, 2005), 70
FR 43913 (July 29, 2005).
132 See proposed CHX Article 20, Rule 8(d)(1).
133 See proposed CHX Article 20, Rule 5; see also
supra notes 50–54 and accompanying text.
134 See supra notes 43–49.
135 See supra notes 40–41 and accompanying text.
136 See supra notes 72–74 and accompanying text.
137 The Exchange has represented that the
Matching System meets the requirements set forth
in Rule 11a2–2(T) and therefore complies with
Section 11(a) of the Act. See text accompanying
notes 79–80. The Commission notes that the
Exchange has the obligation to enforce the
provisions of the Act, including Section 11(a)
thereunder.
131 The
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before routing an order to another
market is consistent with previous
Exchange rules requiring members to
‘‘clear the post’’ prior to routing orders
to other markets, which also were
intended to promote interaction of
orders on the Exchange.
B. Routing
The Exchange proposes to provide
outbound routing services to
participants for orders submitted to the
Exchange that cannot be executed in
whole or in part on the Exchange
because of the trade-through provisions
of Regulation NMS. The Exchange will
use its own systems to determine when,
how and where orders are routed away
to other markets. To provide the
necessary connectivity to transmit such
orders to, and obtain executions on,
other markets, the Exchange proposes to
use the services of a third-party brokerdealer. The services would be provided
pursuant to three separate agreements
among the Exchange, the participant on
whose behalf orders would be routed,
and the third-party broker-dealer. The
Exchange has represented that its
routing services would be provided in
accordance with its rules, the Act, and
the rules thereunder. In particular, the
Exchange routing arrangements would:
(1) Provide for the equitable allocation
of reasonable, dues, fees, and other
charges among its participants and other
persons using its facilities relating to the
routing services; and (2) prohibit unfair
discrimination among customers,
issuers, brokers or dealers in connection
with the routing services.
The Commission received one
comment letter regarding the proposed
rule change relating to routing
services.138 In its comment letter, OES
asserted that the third-party brokerdealer described above would operate as
a system of communication of the
Exchange and therefore should be
deemed a facility of the Exchange under
Section 3(a)(2) of the Act. In
Amendment No. 2, CHX responded to
the OES Letter and stated its view that
the third-party broker-dealer would not
be a facility of the Exchange.
The Commission does not believe that
the third-party broker-dealer providing
connectivity to other markets as
described above should necessarily be
deemed to be a facility of the Exchange.
Unlike the broker-dealer addressed in
the Commission’s Order approving the
Pacific Exchange’s rules establishing the
Archipelago Exchange,139 the third-
party broker-dealer will not be owned
by CHX or an affiliate of CHX. In this
case, CHX will use its own systems to
determine when, how, and where orders
are routed away to other markets.
Moreover, all of the terms and
conditions for CHX members to obtain
outbound routing services will be
subject to CHX rules, which must be
filed for approval with the Commission.
The CHX rules must, among other
things, provide for the equitable
allocation of reasonable fees or other
charges for outbound routing services
and must not permit unfair
discrimination among CHX members for
access to the outbound routing services.
CHX is contracting with an unaffiliated
third-party broker-dealer solely to
provide the necessary connectivity to
obtain the execution of outbound orders
on other markets. Given this limited
role, the third-party broker-dealer
should not be deemed a facility of CHX
under Section 3(a)(2) of the Act.
Accordingly, the Commission finds that
CHX’s proposed routing arrangements
are consistent with the Act.
C. Market Makers
Exchange market makers would be
required to engage in a course of
dealings to assist in the maintenance, to
the extent reasonably practicable, of fair
and orderly markets.140 Specifically,
market makers would have an obligation
to maintain continuous two-sided
quotes for the securities in which it is
registered, at prices reasonably related
to the prevailing market; to maintain
adequate capital; and to meet certain
monthly quotation requirements.141 The
proposed rules also impose other
obligations on market makers, including
a requirement to establish information
barriers when engaging in other
business activities.142 These rules
governing CHX market makers are
similar to other exchanges’ rules
previously approved by the
Commission.143 Accordingly, the
Commission believes that the proposed
rules are consistent with the Act.
D. Institutional Brokers
Under the Exchange’s proposed rules,
institutional brokers would be
considered to be ‘‘on the Exchange,’’
and as such, customer orders received
by an institutional broker would be
deemed to be on the Exchange and
immediately subject to the Exchange’s
rules.144 For example, the proposed
140 See
proposed CHX Article 16, Rule 8.
id.
142 See supra note 64 and accompanying text.
143 See, e.g., Nasdaq Rule 4613 and NYSE Arca
Equities Rules 7.23–7.26.
144 See supra note 137.
141 See
138 OES
Letter, supra note 4.
Securities Exchange Act Release No.
44983 (October 25, 2001) 66 FR 55225 (November
1, 2001).
139 See
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rules require that institutional brokers
use an electronic system, acceptable to
the Exchange, integrating an
institutional broker’s trading activities
in the Matching System, outside of the
Matching System, and in other market
centers.145 Additionally, because
institutional brokers could execute
orders outside of the Matching System
but still on the Exchange, the Exchange
has proposed rules to govern this
activity.146 First, such transactions
would be required be reported to the
Exchange within 10 seconds after the
trade occurs. Further, the Exchange
represents that it has built a
functionality to allow an institutional
broker to pull up a ‘‘validation window’’
to ensure that a trade being done outside
of the Matching System does not violate
trade-through provisions. In addition, to
help ensure that trades outside of the
Matching System are not inconsistent
with an institutional broker’s fiduciary
duties, once an institutional broker
pulls up a validation screen, it would be
required to complete the transaction and
could not cancel out of the
functionality, subject to certain limited
exceptions.147
The Commission believes that the
proposed rules governing institutional
brokers should allow the Exchange to
monitor appropriately the activities of
institutional brokers and to help ensure
that they are complying both with the
rules of the Exchange and their
fiduciary duties. The Commission also
believes that the proposed rules will
require the Exchange to carefully
oversee the activities of institutional
brokers, and to detect any potential
abuses. Accordingly, the Commission
believes that the proposed rules
governing institutional brokers are
consistent with the Act.
E. Regulation NMS
The Commission believes that the
proposed rule change is consistent with
the requirements of Regulation NMS.148
In proposed Article 20, Rule 6, CHX
proposes to adopt a rule with regard to
locked and crossed markets, as required
by Rule 610(d) of Regulation NMS.149
The Exchange’s proposed rules include
marking certain orders meeting the
requirements of Rule 600(b)(30) of
145 See
proposed CHX Article 17, Rule 3(b).
supra notes 68–71 and accompanying text.
147 See proposed CHX Article 17, Rule 3,
Interpretation and Policy .03. The institutional
broker would only be permitted to cancel out of the
functionality if the broker mistakenly input the
wrong symbol for the security, or the transaction
may be cancelled pursuant to CHX Article 20, Rules
9, 10, or 11.
148 See 17 CFR 242.600 et seq.
149 17 CFR 242.610(d).
146 See
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Regulation NMS 150 as intermarket
sweep orders and accepting orders
marked as intermarket sweep orders,
which would allow orders so designated
to be automatically matched and
executed without reference to protected
quotations at other trading centers. The
Commission also believes that CHX’s
proposed immediate-or-cancel
functionality 151 is consistent with Rule
600(b)(3) of Regulation NMS. The
Exchange has designed its proposed
rules relating to orders types and
eligibility 152 and order execution 153 to
comply with the requirements of
Regulation NMS. As noted above, these
proposed rules provide that the
Matching System will accept only
orders (except for cross orders, as
discussed above) that meet the
increment requirements of Rule 612 of
Regulation NMS (unless and to the
extent exempted from Rule 612 by
Commission order).154
In addition, as mentioned above in
Section II.A, the Matching System is
designed to qualify as an automated
trading center under Rule 600(b)(3) of
Regulation NMS.155 To ensure that its
systems immediately and automatically
process orders, the Exchange has
included in its rules a requirement that
it use automated systems to send test
IOC orders to the Matching System to
determine whether it accepts the order
automatically.156 Similarly, the
Exchange will also use automated
monitoring systems to review, in real
time, the Matching System’s handling of
test IOC orders to determine whether,
and within what time frame: (1) IOC
orders are executed against the
displayed quote, up to its full size; (2)
any unexecuted portion of the IOC order
is cancelled; (3) 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 ordersending firm); and (4) 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).157 The Exchange’s rules
provide that it would automatically and
immediately append a ‘‘manual’’
identifier to the bids and offers it makes
publicly available when it has reason to
150 17
CFR 242.600(b)(30).
proposed CHX Article 1, Rule 2(m).
152 See discussion supra Section II.A.1.
153 See discussion supra Section II.A.3.
154 17 CFR 242.612.
155 17 CFR 242.600(b)(3).
156 See proposed CHX Article 20, Rule 5,
Interpretation and Policy .02.
157 See proposed Article 20, Rule 5, Interpretation
and Policy .02.
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believe that it is not capable of
displaying automated quotations.
The Exchange has proposed a rule
that renders an inbound round-lot order
ineligible for execution on the Exchange
if such order would cause an improper
trade-through under Rule 611 of
Regulation NMS.158 The Commission
also notes that the proposed rules
provide procedures that the Exchange
will follow to determine whether a trade
would create an improper trade-through
and how the Exchange will apply
various exceptions to Rule 611 of
Regulation NMS, including the self-help
exception.159
a participant would not be in violation
of CHX Article 9, Rule 17 if it satisfied
bids and offers in other markets in
accordance with the requirements for a
‘‘cross with satisfy order’’ is consistent
with the Act.162 The Commission notes
that the conditions of the cross with size
order provide that a participant 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
and the participant’s customer has
specifically agreed to that outcome.163
F. Other Rule Changes
In addition to the rules described in
detail above, the proposed rule change
would adopt or amend a number of
other Exchange rules that address,
among other things, hours of trading,
trading halts, cancelling transactions,
trading permits, sponsored access,
limitations of liability, trade execution,
Exchange registration, business conduct,
fingerprinting, reporting transactions,
riskless principal transactions,
disciplinary matters and trial
proceedings, arbitration, books and
records, clearance and settlement, and
listing on the exchange. The
Commission believes that these rules are
appropriate and consistent with the Act,
and many are similar to rules previously
approved by the Commission at other
exchanges.160
The Commission believes that the
Exchange’s proposed interpretation to
its trading ahead rule in CHX Article 9,
Rule 17, confirming that a participant
would be deemed to be holding an
unexecuted customer order when that
order has been sent to the Matching
System but remains unexecuted,161 is
consistent with the Act. The
Commission believes that this rule
appropriately confirms that a
participant will remain the agent for any
customer orders that it submits to the
Matching System, and as such, will owe
fiduciary duties to such customer orders
until they are executed.
The Commission also believes that the
proposed interpretation confirming that
IV. Accelerated Approval of
Amendment No. 2
158 See
proposed Article 20, Rule 5(a).
supra notes 51–53 and accompanying text.
160 In particular, the Commission believes that the
proposed changes to the firm’s supervision rules are
appropriate and consistent with the Act. See
proposed CHX Article 6, Rule 5. The Commission
believes that these rules should help to ensure that
participant firms are adequately supervising their
registered and associated persons. The Commission
also notes that these obligations are similar to those
required by other SROs. See, e.g., NASD Rule 3010
and Philadelphia Stock Exchange Rule 748.
161 See proposed CHX Article 9, Rule 17,
Interpretation and Policy .05.
159 See
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Under Section 19(b)(2) of the Act,164
the Commission may not approve any
proposed rule change prior to the
thirtieth day after the date of
publication of notice thereof, unless the
Commission finds good cause for so
doing. As set forth below, the
Commission finds good cause to
approve Amendment No. 2 to the
proposed rule change prior to the
thirtieth day after Amendment No. 2 is
published for comment in the Federal
Register pursuant to Section 19(b)(2) of
the Act.165
The modification made by
Amendment No. 2 to require a cross
with size to be larger than the aggregate
size of all orders in the Matching
System at the same price, rather than
larger only than the largest individual
order,166 merely retains—for the time
being—a condition for cross with size
orders that exists in the Exchange’s
current rules.167 The new provision to
execute various types of cross orders as
crosses with size if they qualify as
such168 simply builds in a directive into
cross orders generally that enables them
to receive a better execution if they meet
the relevant requirements.
The revision made by Amendment
No. 2 regarding cancellation of certain
sell short orders improves the proposal
by accounting for situations in which an
appropriate price cannot be determined
for an order of this type.169 The addition
of the ‘‘ISO Cross’’ order type makes
explicit that a cross order, like other
orders, may be appended with ISO
162 See proposed CHX Article 9, Rule 17,
Interpretation and Policy .06.
163 See supra note 20 (discussing cross with
satisfy orders).
164 15 U.S.C. 78s(b)(2).
165 Id.
166 See supra note 81.
167 See current CHX Article XXA, Rule 2(c)(4).
168 See supra note 82.
169 See supra note 83.
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instructions.170 The revision regarding
new display instructions 171 changes
only the method by which such an
instruction would need to be submitted,
but alters no principle of priority
included in the original proposal.
Amendment No. 2 also improves the
proposal by confirming the
circumstances in which the Matching
System would display quotes that
would lock or cross the protected quotes
of other markets,172 and appropriately
spells out that the Matching System will
trade in increments supported by the
ITS or Regulation NMS linkage plan, as
may be applicable.173 Another provision
adds clarity to how orders should be
identified, according to the proposed
rules, when a trade is executed pursuant
to both the intermarket sweep order
exception of Rule 611(b)(5) or (6) of
Regulation NMS and the self-help
exception of Rule 611(b)(1) of
Regulation NMS.174 Other clarifying
changes similarly enhance the
proposal.175
Amendment No. 2 also incorporates a
number of added restrictions and
requirements for market makers that set
forth in more detail the parameters by
which market making may take place on
the Exchange and should aid in the
prevention of abuses.176 In addition,
Amendment No. 2 sets forth provisions
requiring the Exchange to maintain
internal controls designed to restrict the
flow of confidential and proprietary
information between the Exchange and
the third-party broker-dealer providing
connectivity to other markets. The
provision added by Amendment No. 2
to permit ‘‘qualified contingent trades’’
to be executed on the Exchange 177
merely assures that market participants
would be able to benefit from the
Commission’s order exempting from
Rule 611(a) any trade-throughs caused
by such trades. The revisions to the text
to reflect and conform to recent changes
made as the result of other, recently
approved CHX proposals,178 as well as
the technical changes and corrections
included in Amendment No. 2, raise no
substantive issues. Finally, a number of
the changes mirror rules that already
have been approved for other
exchanges.
For the above reasons, the
Commission believes that the revisions
to the proposed rule change made by
170 See
supra note 84.
supra note 86.
172 See supra note 87.
173 See supra, note 88.
174 See supra note 89.
175 See supra notes 90–95 and accompanying text.
176 See supra notes 96–97 and accompanying text.
177 See supra notes 97–99 and accompanying text.
178 See supra note 101.
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Amendment No. 2 pose no significant
regulatory concerns, and should not
delay implementation of the proposal.
The Commission also believes that
accelerated approval is reasonable
because it should help to ensure that the
appropriate rules are in place at the
Exchange at the time that the CHX’s
final technical specifications with
respect to Regulation NMS must be
published.
V. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning Amendment No.
2, including whether Amendment No. 2
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–2006–05 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–CHX–2006–05. 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 the filing also will be
available for inspection and copying at
the principal office of CHX. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
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59573
Number SR–CHX–2006–05 and should
be submitted on or before October 31,
2006.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,179 that the
proposed rule change (File No. SR–
CHX–2006–05), as amended by
Amendment No. 1, be, and hereby is,
approved, and that Amendment No. 2 to
the proposed rule change be, and hereby
is, approved on an accelerated basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.180
Nancy M. Morris,
Secretary.
[FR Doc. E6–16626 Filed 10–6–06; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54558; File No. SR–NASD–
2006–076]
Self-Regulatory Organizations:
National Association of Securities
Dealers, Inc.; Notice of Filing and
Order Granting Accelerated Approval
of Proposed Rule Change To Exempt
All Securities Included in the Nasdaq100 Index From the Price Test Set
Forth in NASD Rule 5100
October 2, 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 June 15,
2006, the National Association of
Securities Dealers, Inc. (‘‘NASD’’) filed
with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III below, which Items
have been prepared by NASD. On
August 18, 2006, NASD filed
Amendment No. 1 to the proposed rule
change.3 On September 20, 2006, NASD
filed Amendment No. 2 to the proposed
rule change, as amended.4 The
Commission is publishing this notice to
solicit comments on the proposed rule
179 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 In Amendment No. 1, which supplemented the
original filing, NASD modified the scope of the
proposed rule change and made certain technical
and clarifying changes following discussions with
Commission staff.
4 After discussions with Commission staff, NASD
filed Amendment No. 2 to modify its discussion of
the purpose of the proposed rule filing and to make
other technical and clarifying rule changes.
Amendment No. 2 replaced and superseded the
original filing in its entirety.
180 17
E:\FR\FM\10OCN1.SGM
10OCN1
Agencies
[Federal Register Volume 71, Number 195 (Tuesday, October 10, 2006)]
[Notices]
[Pages 59563-59573]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-16626]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54550; File No. SR-CHX-2006-05]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Order Approving a Proposed Rule Change and Amendment No. 1 Thereto and
Notice of Filing and Order Granting Accelerated Approval to Amendment
No. 2 Thereto to Implement a New Trading Model
September 29, 2006.
I. Introduction
On February 2, 2006, 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 its rules to implement a new trading
model that provides the opportunity for fully automated executions to
occur within a central matching system (the ``Matching System''). On
August 10, 2006, the Exchange filed Amendment No. 1 to the proposed
rule change. The proposed rule change, as amended by Amendment No. 1,
was published for comment in the Federal Register on August 18,
2006.\3\ The Commission received one comment letter on the proposal.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 54301 (August 10,
2006), 71 FR 47836 (``Trading Rules Notice'').
\4\ See Letter from Michael A. Barth, Senior Vice President,
Exchanges and Market Centers, Order Execution Services Holdings,
Inc. (``OES''), to Nancy M. Morris, Secretary, Commission, dated
August 25, 2006 (``OES Letter'').
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On September 29, 2006, the Exchange filed Amendment No. 2 to the
proposed rule change.\5\ This order approves the proposed rule change,
as amended by Amendment No. 1. Simultaneously, the Commission is
providing notice of filing of, and granting accelerated approval to,
Amendment No. 2 to the proposed rule change.
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\5\ See Form 19b-4 dated September 29, 2006 (``Amendment No.
2''). The text of Amendment No. 2 is available on CHX's Web site
(https://www.chx.com), at the principal office of CHX, and at the
Commission's Public Reference Room. See infra Section II.E for a
discussion of Amendment No. 2.
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II. Description
The Exchange proposes to amend its rules in order to implement a
new trading model that would allow Exchange participants to interact in
a
[[Page 59564]]
fully-automated Matching System. In addition, the proposed rules would
enable qualifying participant firms to register as ``institutional
brokers,'' that, among other things, would be permitted to execute
transactions outside of the Matching System under specified
conditions.\6\ Many of the features of the new trading model are
designed to comply with Regulation NMS \7\ as of the ``Trading Phase
Date'' for the implementation of that regulation--February 5, 2007.\8\
The Exchange is also proposing a number of other changes to its rules
in an effort to update them generally, as well as to reflect the
elimination of the trading floor and the new automated trading system
that will be central to the Exchange's new trading model.
---------------------------------------------------------------------------
\6\ See infra Section II.C. for a more detailed discussion.
\7\ 17 CFR 242.600 et seq.
\8\ See infra note 27.
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A. The Matching System
The Matching System would be the core facility of the Exchange's
new trading model. The Exchange would no longer operate a physical
trading floor, but rather would operate an automated Matching System
where Exchange participants could submit orders from any location for
possible immediate execution.
1. Eligible Orders and Order Types
The Matching System generally would accept orders that are day
orders, limit orders, and orders for regular way settlement.\9\ 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
would be required to be submitted only in those share sizes.\10\ The
Exchange believes that its quotations would qualify as ``automated
quotations'' under Rule 600(b)(3) of Regulation NMS.\11\
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\9\ See proposed CHX Article 20, Rule 4(a)(1)-(3). The proposed
rules provide for certain exceptions to these basic order
eligibility requirements. For example, the Matching System would
also accept immediate-or-cancel (``IOC'') market orders, and would
permit a ``non-regular way cross order'' to be submitted for
execution and non-regular way settlement. See proposed CHX Article
20, Rules 4(a)(7) and 4(b)(13) and (16).
\10\ See proposed CHX Article 20, Rule 4(a)(4).
\11\ See 17 CFR 242.600(b)(3). The Exchange's proposed rules
provide that each order submitted to the Matching System must be a
firm order and cannot be identified as a ``manual'' quotation. See
proposed CHX Article 20, Rule 3(a). See also infra note 54 and
accompanying text.
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Some of the order types accepted by the Matching System that the
Exchange describes as more routine would include immediate or cancel
(``IOC'') limit and market orders,\12\ fill or kill (``FOK'')
orders,\13\ sell short and short exempt orders,\14\ reserve size
orders,\15\ time in force orders \16\ and cancel on halt orders.\17\
The Matching System also would accept several different types of cross
transactions, including a cross,\18\ a cross with size,\19\ a cross
with satisfy,\20\ a cross with yield,\21\ a midpoint cross,\22\ an ISO
cross,\23\ an opening cross,\24\ and a non-regular way cross.\25\
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\12\ IOC 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. See proposed CHX Article 20, Rules 4(b)(12) (IOC orders) and
4(b)(13) (IOC market orders).
\13\ See proposed CHX Article 20, Rule 4(b)(11).
\14\ See proposed CHX Article 20, Rule 4(b)(21) (sell short
orders) and Rule 4(b)(22) (short exempt orders).
\15\ See proposed CHX Article 20, Rule 4(b)(20).
\16\ See proposed CHX Article 20, Rule 4(b)(23).
\17\ See proposed CHX Article 20, Rule 4(b)(3).
\18\ See proposed CHX Article 20, Rule 4(b)(4). A 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,
for securities listed on any exchange other than Nasdaq (and for
Nasdaq-listed securities, when Regulation NMS is implemented in
those issues), equal to or better than the National Best Bid and
Offer (``NBBO''). A cross may represent interest of one or more
Exchange participants, trading for a proprietary account. See infra
note 43 for a description of cross order executions.
\19\ See proposed CHX Article 20, Rule 4(b)(6). A cross with
size would be required to be 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, for securities listed on the New York
Stock Exchange (``NYSE''), the American Stock Exchange (``Amex''),
or any other exchange except the NASDAQ Stock Market (``Nasdaq'')
(and for Nasdaq-listed securities, when Regulation NMS is
implemented in those issues), equal or better to the NBBO, where the
size of the cross transaction is one round lot larger than the
aggregate size of all interest displayed on the Exchange at that
price. At such time as the Exchange disseminates a feed of all
displayable orders in the Matching System, however, a cross with
size order would be required to be larger only than the largest
order in the Matching System at the relevant price. See Amendment
No. 2. A cross with size transaction may represent interest of one
or more participants of the Exchange. See also infra note 43.
\20\ See proposed CHX Article 20, Rule 4(b)(5). A cross with
satisfy is designed to provide a participant with a 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. A cross with satisfy
could 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 (i) would
not be eligible to satisfy existing bids or offers in the Matching
System at a price that is better than the cross price (when the
participant's customer is on the same side of the order as the
participant), and (ii) 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 (defined elsewhere in the proposed rules) and the
participant's customer has specifically agreed to that outcome. See
also infra note 44.
\21\ See proposed CHX Article 20, Rule 4(b)(7). A cross with
yield 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. See also infra note 45.
\22\ See proposed CHX Article 20, Rule 4(b)(15). A midpoint
cross would execute at the midpoint between the NBBO. However, 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.
\23\ See proposed CHX Article 20, Rule 4(b)(14), added by
Amendment No. 2. An ISO cross would be defined as any type of cross
order marked as required by Regulation NMS to be executed without
taking any of the actions required by the Exchange's relevant rules
to prevent a trade-through.
\24\ See proposed CHX Article 20, Rule 4(b)(17). 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. See also
proposed CHX Article 20, Rule 8(c)(2).
\25\ See proposed CHX Article 20, Rule 4(b)(16). A non-regular
way cross would be designated for non-regular way settlement. 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.
---------------------------------------------------------------------------
The Matching System also would accept several order types that are
related to Regulation NMS,\26\ and that would become effective on the
Trading Phase Date of Regulation NMS.\27\ For example, the Matching
System would accept benchmark orders that meet the requirements of Rule
611(b)(7) of Regulation NMS.\28\ The Matching System would also accept
different types of intermarket sweep orders
[[Page 59565]]
(``ISOs''), such as BBO ISOs,\29\ outbound ISOs \30\ and price-
penetrating ISOs.\31\
---------------------------------------------------------------------------
\26\ 17 CFR 242.600 et seq.
\27\ 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 of Regulation NMS).
\28\ See 17 CFR 242.611(b)(7); see also CHX proposed Article 20,
Rule 4(b)(2). A benchmark order, as defined in the proposed rules,
would be an order submitted by an institutional broker, and could be
executed at any price, without regard to the protected NBBO. A
benchmark order could represent interest of one or more Exchange
participants.
\29\ See proposed CHX Article 20, Rule 4(b)(1). BBO ISOs would
execute against orders at the Exchange's BBO, without regard to
whether the execution would trade through another market's protected
quotation. 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 displayed in the Matching System,
without regard to whether that display would lock or cross another
market center. See proposed CHX Article 20, Rule 6(c)(3).
\30\ An outbound ISO would allow an Exchange participant to ask
the Exchange to execute an order on the Exchange while
simultaneously routing ISOs to those other markets to execute
against their protected quotations. Outbound ISOs would be executed
against any eligible orders in the Matching System (including any
reserve size or other undisplayed orders). Other than the routing of
ISOs to other market centers, no action would be taken to prevent an
improper trade-through. See proposed CHX Article 20, Rule 4(b)(18).
\31\ See proposed CHX Article 20, Rule 4(b)(19). 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.
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In general, the Matching System would accept only orders that
comply with the sub-penny restrictions set forth in Rule 612 of
Regulation NMS.\32\ However, contingent upon the Commission granting
the necessary exemptive relief from Rule 612, the proposed rules would
permit any type of cross order to be submitted to the Matching System
in a sub-penny increment as small as $0.000001, provided that no type
of cross, except midpoint crosses, non-regular-way crosses and cross
with size orders, would be permitted to execute at a price less than
$.01 better than any currently displayed same-sided interest available
on the Matching System (or $.0001 better when the order is priced under
$1.00).\33\
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\32\ 17 CFR 242.612.
\33\ See proposed CHX Article 20, Rule 4(a)(7)(b). See also
Amendment No. 2.
---------------------------------------------------------------------------
Finally, the Matching System would accept ``do-not-display'' and
``do-not-route orders.'' A do-not-display order would be an order, for
at least 1,000 shares when entered, that would not be displayed in
whole or in part, but that would remain eligible for execution within
the Matching System.\34\ A do-not-route order would be executed or
displayed within the Matching System and could not be routed to another
market center.\35\
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\34\ See proposed CHX Article 20, Rule 4(b)(9).
\35\ See proposed CHX Article 20, Rule 4(b)(10). 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 be deemed
to have been received with a ``do not route'' condition because
these orders either are immediately executed in the Matching System
or cancelled.
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2. Ranking and Display of Orders
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 order.\36\ Specifically, orders received
by the Matching System would be ranked as follows: (i) 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; (ii) 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;
and (iii) 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.\37\
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\36\ See proposed CHX Article 20, Rule 8(b). Orders sent to an
institutional broker for handling would not have any priority within
the Matching System unless and until they are received by the
Matching System. Id.
\37\ Id., proposed Rule 8(b)(1)-(3). The refreshed displayed
portion of a reserve-size order would receive a new ranking based on
the time it was refreshed, with any remaining undisplayed portion
retaining the ranking at which it was originally received. Id.,
proposed Rule 8(b)(4). A change to an order's size or price, or its
displayed portion, could impact its ranking within the Matching
System. A change to the display instructions associated with an
order would need to be submitted as a new order and would be ranked
based on the time the new order was received. Id., proposed Rule
8(b)(5). See also Amendment No. 2.
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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.
For display purposes, 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.\38\
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\38\ Id., proposed Rule 8(b)(6). For execution purposes,
however, all orders would retain their rankings as described above.
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3. Automatic Execution
Incoming orders generally would be matched against 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.\39\ 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,\40\ it or its residual portion would be placed in the
Matching System and ranked.\41\
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\39\ See proposed CHX Article 20, Rule 8(d)(1). This general
rule would be subject to certain exceptions specifically set forth
in proposed CHX Article 20, Rule 8(e), and subject to the provisions
relating to the prevention of trade-throughs in proposed CHX Article
20, Rule 5.
\40\ See proposed CHX Article 20, Rules 4(b)(11) through (13).
Orders that would be immediately cancelled, if not executed, include
FOK orders and IOC limit and market orders.
\41\ See proposed CHX Article 20, Rule 8(d)(2); see also supra
note 37 and accompanying text.
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The proposed rules describe certain order types that would be
subject to specific executions within the Matching System.\42\ Such
order types include cross and cross with size orders,\43\ cross with
satisfy orders,\44\ cross with yield orders,\45\ sell short orders,\46\
do-not-
[[Page 59566]]
display orders,\47\ and inbound ITS commitment or linkage plan
orders.\48\ The proposed rules also describe the handling of orders in
locked and crossed markets.\49\
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\42\ See proposed CHX Article 20, Rule 8(e).
\43\ See proposed CHX Article 20, Rule 8(e)(1). Cross and cross
with size orders would be automatically executed if they meet the
requirements for such order types, and would be immediately and
automatically cancelled if they do not meet these requirements.
\44\ See proposed CHX Article 20, Rule 8(e)(4). In executing
cross with satisfy orders, 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. 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 Regulation 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. See also
supra note 20.
\45\ See proposed CHX Article 20, Rule 8(e)(2). A cross with
yield order would be automatically executed by matching the
participant as principal against the customer order if the customer
order that is part of a cross with yield order is at a price better
than the currently displayed best bid or offer in the Matching
System; 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. If the
customer order that is part of a cross with yield order is not
eligible for an immediate execution because it is not priced better
than the currently displayed bid or offer in the Matching System,
the cross with yield order would be immediately and automatically
cancelled. See also supra note 21.
\46\ See proposed CHX Article 20, Rule 8(e)(5). 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'') under the Act and Regulation SHO. 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 re-priced (without violating its limit price)
to the next available price at which it can be executed or
displayed. If the Matching System cannot determine an appropriate
price at which to execute or display the order, the order would be
automatically cancelled. See Amendment No. 2.
\47\ See proposed CHX Article 20, Rule 8(e)(6). A do-not-display
order 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.
\48\ See proposed CHX Article 20, Rule 8(e)(7).
\49\ See proposed CHX Article 20, Rule 6 and proposed CHX
Article 20, Rule 5, Interpretation and Policy .01(e).
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4. Preventing Trade-Throughs
An inbound order for at least one round lot would not be eligible
for execution on the Exchange if its execution would cause an improper
trade-through, both prior to and following the Trading Phase Date of
Rule 611 of Regulation NMS.\50\ The proposed rules provide that the
Exchange will follow a series of trade-through policies and procedures
in determining whether a trade on the Exchange would create an improper
trade-through.\51\ These procedures include clock synchronization
practices, as well as plans for applying the exceptions to Rule 611 of
Regulation NMS. For example, the Exchange's rules contemplate using the
self-help exception in Rule 611(b)(1) of Regulation NMS.\52\ Further,
the Exchange would automatically place an appropriate modifier on
trades executed pursuant to an exemption from, or exception to, Rule
611 of Regulation NMS in accordance with specifications approved by the
operating committee of the relevant national market system plan for an
NMS stock. If a trade is executed pursuant to both the intermarket
sweep order exception of Rule 611(b)(5) or (6) of Regulation NMS and
the self-help exception of Rule 611(b)(1) of Regulation NMS, the trade
would be identified as executed pursuant to the intermarket sweep order
exception.\53\ The proposed rules also set forth the procedures that
the Exchange would use to confirm that its own bids and offers qualify
as automated quotations and, if they do not qualify as automated
quotations, how the Exchange will identify such quotations as
manual.\54\
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\50\ See proposed CHX Article 20, Rule 5. An inbound order for
at least one round lot would not be eligible for execution on the
Exchange if its execution would cause an improper trade-through of
another ITS market or if, when Regulation NMS is implemented for a
security, the execution of all or a part of the order would be
improper under Rule 611 of Regulation NMS. 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.
\51\ See proposed CHX Article 20, Rule 5, Interpretation and
Policy .01.
\52\ See 17 CFR 242.611(b)(1); see also proposed CHX Article 20,
Rule 5, Interpretation and Policy .01(d).
\53\ See proposed CHX Article 20, Rule 5, Interpretation and
Policy .01(h). See also Amendment No. 2.
\54\ See proposed CHX Article 20, Rule 5, Interpretation and
Policy .02. Specifically, the Exchange would send test IOC orders to
the Matching System to make this determination. See also supra, note
11 and accompanying text.
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5. Order Routing
The proposed rules also contain provisions governing the routing of
orders to other markets when execution in the Matching System would
cause an improper trade-through.\55\ 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 orders or commitments necessary to
satisfy the bids or offers of other markets (``routing services'').
Otherwise, any inbound order for at least a round lot is not eligible
for execution on the Exchange if its execution would cause an improper
trade-through.\56\
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\55\ See proposed CHX Article 20, Rule 5, Interpretation and
Policy .03.
\56\ See proposed CHX Article 20, Rule 5(a).
---------------------------------------------------------------------------
The Exchange proposes to provide these routing services pursuant to
the terms of three separate agreements, to the extent that they are
applicable to a specific routing decision: (i) An agreement between the
Exchange and each participant on whose behalf orders will be routed;
(ii) 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; and (iii) an agreement
between the Exchange and the specified third-party broker-dealer
pursuant to which the third-party broker-dealer would agree to provide
routing connectivity to other markets and serve as a ``give-up'' for
the Exchange's participants in other markets. In providing the routing
services, the Exchange would use its own systems to determine when,
how, and where orders (or commitments) are routed away to other
markets.\57\ In addition, the Exchange will establish and maintain
procedures and internal controls reasonably designed to adequately
restrict the flow of confidential and proprietary information between
the Exchange (including its facilities) and the third-party broker-
dealer, and, to the extent the third-party broker-dealer reasonably
receives confidential and proprietary information, that adequately
restrict the use of such information by the third party broker-dealer
to legitimate business purposes necessary to provide routing
connectivity and to serve as a ``give-up.'' \58\
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\57\ Id.
\58\ See Amendment No. 2, supra note 5.
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6. Locking and Crossing Quotations
With certain exceptions, Exchange participants would be required to
reasonably avoid displaying, and refrain from engaging in a pattern or
practice of displaying, any quotations that lock or cross a protected
quotation.\59\ An order would not be eligible for display on the
Exchange if its display would improperly lock or cross the ITS best bid
or offer or, as of the Trading Phase Date of Regulation NMS for a
security, if its display would constitute a locking or crossing
quotation.\60\ These otherwise locking or crossing orders would either
be automatically routed to another appropriate market or, if designated
as ``do not route,'' automatically cancelled.
---------------------------------------------------------------------------
\59\ See proposed CHX Article 20, Rule 6. The exceptions are
provided when: (i) The locking or crossing quotation was displayed
at a time when the other trading center was experiencing a failure,
material delay, or malfunction of its systems or equipment; (ii) the
locking or crossing quotation was displayed at a time when a
protected bid was higher than a protected offer in the NMS stock; or
(iii) the Exchange participant displaying the locking or crossing
quotation simultaneously routed an intermarket sweep order to
execute against the full displayed size of any locked or crossed
protected quotation.
\60\ See proposed CHX Article 20, Rule 6.
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B. Market Makers
The proposed rules in Article 16 set forth the responsibilities of
a participant that registers as a market maker on the Exchange.\61\ In
particular, a market maker would be required to engage in a course of
dealings for its own account to assist in the maintenance, to the
extent reasonably practicable, of fair and
[[Page 59567]]
orderly markets on the Exchange. A market maker's responsibilities
would specifically include: (1) Using automated systems to maintain a
continuous two-sided quote, for at least a round-lot, in each of the
securities in which it is registered; \62\ (2) maintaining adequate
minimum capital; and (3) meeting specific quotation or trade
requirements, with respect to its dealings on the Exchange, over the
course of each calendar month.\63\ In addition, a market maker that is
registered as a market maker solely on the Exchange and engages in
other business activities (or that is affiliated with a broker or
dealer that engages in other business activities) would be required to
establish information barriers that prevent the market maker from using
material, non-public information or information about customer order
flow handled by the firm in its trading activities.\64\
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\61\ An Exchange-registered market maker would be permitted to
trade only on a proprietary basis and would not be permitted to
handle any agency orders on the Exchange. To the extent that a
participant firm wants to act as an Exchange-registered market maker
and also handle orders from customers outside the facilities of the
Exchange, it would be required to create and strictly enforce
information barrier procedures as described infra at note 64 and
accompanying text. Since Exchange-registered market makers are not
permitted to handle agency orders, the Matching Engine will reject
any cross order instructions entered by a market maker in its market
maker trading account. See proposed CHX Article 16, Rule 1,
Interpretation and Policy .02. See also Amendment No. 2.
\62\ A market maker's continuous two-sided quotes would be
required to be at prices which are reasonably related to the
prevailing market price of the security. See CHX Article 16, Rule 8,
Interpretation and Policy .01.
\63\ See proposed CHX Article 16, Rule 8(a)-(c).
\64\ See proposed CHX Article 16, Rule 9.
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C. Institutional Brokers
Participant firms for which the Exchange is the designated
examining authority could register with the Exchange as institutional
brokers.\65\ Institutional brokers would be deemed to be participants
operating on the Exchange, although they would not effect transactions
from a physical trading floor (since the Exchange will no longer have a
physical trading floor) and could trade from any location. A customer
order would be deemed to be on the Exchange when received by an
institutional broker, but would not have priority in the Matching
System until it is entered into the system.
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\65\ See proposed CHX Article 17, Rule 1. Each individual that
would be authorized to effect trades on behalf of the firm would be
required to separately register as an institutional broker
representative. See proposed CHX Article 17, Rule 1, Interpretation
and Policy .02.
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Institutional brokers would be required to: (1) Enter all orders
received for execution on the Exchange into an automated system to
provide an electronic record of their order handling practices; (2)
handle orders with an electronic system acceptable to the Exchange that
integrates their on-exchange activities with the Matching System and
their trading activities in other market centers; and (3) maintain
separate accounts for handling agency transactions, principal
transactions, and transactions involving errors.\66\ Institutional
brokers would also be required to maintain required records of their
trading activities.\67\ An institutional broker would be required to
use due diligence to execute a market order at the best price
available; to use due diligence to execute a limit order at or better
than the limit price, if available; and to use brokerage judgment in
the execution of a not held order.\68\
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\66\ See proposed CHX Article 17, Rule 3(a) through Rule 3(c).
The Commission recently approved, and the Exchange has implemented,
a proposed rule change regarding requirements for entering orders
into an electronic system to permit the Exchange to more readily
surveil broker order handling activities. See CHX Article 11, Rule
3; Securities Exchange Act Release No. 53772 (May 8, 2006), 71 FR
27758 (May 12, 2006).
\67\ See proposed CHX Article 17, Rule 3(f).
\68\ See proposed CHX Article 17, Rule 3(d).
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Institutional brokers would be required to use reasonable efforts
to report all transactions that are not effected through the Exchange's
Matching System to the Exchange within 10 seconds of the trade.\69\ If
an institutional broker executes an order outside of the Matching
System, it would be required to use the Exchange's Brokerplex system to
determine whether a trade would constitute a trade-through and create
an electronic record that such validation had taken place.\70\ In
general terms, the Brokerplex system would allow an institutional
broker to input the symbol for a security and pull up a window that
includes a snapshot of the Matching System BBO and the NBBO. The
institutional broker then could report a trade that is consistent with
the orders in the Matching System and the NBBO. An institutional broker
that initiates the use of this functionality to report a proprietary
trade against a customer order would be required to complete the
transaction report (without cancelling out of the functionality),
unless the institutional broker had mistakenly input the symbol for the
wrong security. The transaction also could be cancelled pursuant to CHX
rules relating to cancellations of transactions, clearly erroneous
transactions and systems disruptions and malfunctions.\71\
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\69\ See proposed CHX Article 17, Rule 3(e).
\70\ See CHX Article 17, Rule 3, Interpretation and Policy .03.
\71\ See id.
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Unless a customer specifically requests otherwise, an institutional
broker would be required to clear the Matching System before sending an
order to another market for execution.\72\ The proposed rules provide
exceptions to this requirement for: (1) Outbound ITS commitments or
ISOs that are being sent to another market to satisfy its displayed bid
or offer;\73\ and (2) customer orders that are being sent to another
market that could not be executed in the Matching System.\74\
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\72\ See proposed CHX Article 20, Rule 7. Any customer
directives for special handling of orders would have to be
documented and reported to the Exchange.
\73\ See proposed CHX Article 20, Rule 7(c).
\74\ See proposed CHX Article 20, Rule 7(d).
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D. Other Rule Changes
Proposed Article 9, Rule 17, based on an existing Exchange rule
prohibiting participants from trading ahead of customer orders, would
include a provision confirming that a participant would be deemed to be
holding an unexecuted customer order when that order has been sent to
the Matching System, but remains unexecuted.\75\
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\75\ See proposed CHX Article 9, Rule 17, Interpretation and
Policy .05. The proposed rule would also confirm that a participant
would not be in violation of the ``trading ahead'' rule if it
satisfied bids and offers in other markets in accordance with the
requirements for a ``cross with satisfy order.'' See proposed CHX
Article 9, Rule 17, Interpretation and Policy .06; see also supra
note 20 (discussing cross with satisfy orders).
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The Exchange proposes to adopt a sponsored access rule, which would
allow Exchange participants to provide non-participant broker-dealers
with access to the Exchange.\76\ Under the proposed rule, this type of
sponsored access could be provided so long as the participant
sponsoring access, the non-participant broker-dealer, and the Exchange
entered into appropriate agreements confirming basic information about
the parties' roles and responsibilities.\77\
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\76\ See proposed CHX Article 5, Rule 3.
\77\ See id.
---------------------------------------------------------------------------
In addition to the changes described above, the Exchange has also
proposed revisions to virtually every other chapter of its rules. These
changes are generally designed to remove references to the physical
trading floor, delete obsolete provisions and account for the new
automated trading model, as well as to better streamline and organize
the rules. For example, the CHX proposes to delete rules relating to
specialists and access to the trading floor and adopt rules that
contemplate remote access to the Exchange's automated trading systems.
In addition, changes are being proposed to rules relating to: hours of
trading, trading halts, cancelling transactions, business conduct,
disciplinary matters and trial proceedings, arbitration, Exchange
emergency suspension authority; committees; trading permits; limitation
of liability; voting designees; registration; fingerprinting; reporting
transactions; riskless principal
[[Page 59568]]
transactions; use of a customer's give-up; books and records; firm
supervision; ITS; clearance and settlement; and listing on the
Exchange.
E. Amendment No. 2
On September 29, 2006, the Exchange filed Amendment No. 2 to the
proposed rule change, which made certain revisions to the original
proposal, as amended by Amendment No. 1. In Amendment No. 2, the
Exchange described its proposed phase-in plan for the new trading
model.\78\ In Amendment No. 2, the Exchange also provided additional
discussion and clarification on certain aspects of the proposal.
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\78\ The Exchange stated that it plans to phase in the new
trading model as follows: (i) Beginning the week of October 2, 2006,
the Exchange will begin to transition Nasdaq-listed securities to
the Matching System; (ii) during the week of October 16, 2006, the
Exchange will begin to transition all other securities that are not
currently traded by specialists to the Matching System; and (iii) by
early November 2006, the Exchange will begin to transition
securities currently traded by the Exchange's specialists to the
Matching System. The Exchange stated that, in the near future, it
will provide notice to participants of the exact dates for
transition of specific securities.
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The Exchange also added a discussion of how the Exchange believes
that the rules of the proposed new trading model will be consistent
with Section 11(a) of the Act.\79\ The Exchange stated that it believes
that the proposed Matching System meets the requirements of Rule 11a2-
2(T) under the Act,\80\ known as the ``effect versus execute'' rule,
which provides an exemption from the prohibition of Section 11(a).
Further, the Exchange stated that it believes that the proposal does
not raise any of the policy concerns that Congress sought to address in
Section 11(a) of the Act including, specifically, the time and place
advantages that members on exchange floors might have over non-members
off the floor and the general public.
---------------------------------------------------------------------------
\79\ 15 U.S.C. 78k(a).
\80\ 17 CFR 240.11a2-2(T).
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In Amendment No. 2, the Exchange also made certain changes to the
rule text reflecting modifications in how the Matching System will
operate. Specifically, the Exchange modified the proposed rules to: (1)
Amend the definition of a ``cross with size'' order; \81\ (2) confirm
that the Matching System will evaluate most cross orders to see if they
meet the ``cross with size'' definition and, if so, will execute them
as crosses with size; \82\ (3) provide that, when the Matching System
lacks sufficient information to determine the appropriate price at
which a sell short order could be displayed or executed, the Matching
System will automatically cancel the order; \83\ (4) confirm that cross
orders can be submitted as ISOs; \84\ (5) remove references to
functionality that is not being built; \85\ and (6) confirm that a
participant cannot change a ``display'' instruction for an order, but
must submit a new order with a new display instruction.\86\ In
addition, the Exchange revised the proposed rules to confirm the
circumstances when the Matching System would display quotes that would
lock or cross the protected quotes of other markets \87\ and to clarify
that the Matching System will trade in increments supported by the ITS
or Regulation NMS linkage plan.\88\ The Exchange also clarified how a
trade should be identified when it is executed pursuant to both the
intermarket sweep order exception of Rule 611(b)(5) or (6) of
Regulation NMS and the self-help exception of Rule 611(b)(1) of
Regulation NMS.\89\
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\81\ See proposed CHX Article 20, Rule 4(b)(6) (requiring a
cross with size to size out all of the displayed interest at a
price, but providing that, once the CHX is disseminating a book
feed, a cross with size would only be required to size out the
largest displayed order).
\82\ See proposed CHX Article 20, Rule 4(b)(6).
\83\ See proposed CHX Article 20, Rule 8(e)(5).
\84\ See proposed CHX Article 20, Rule 4(b)(14).
\85\ See proposed CHX Article 20, Rule 4(a)(7)(b) (removing a
reference to an order that executes at the midpoint of the NBBO,
because this functionality is not being built at this time).
\86\ See proposed CHX Article 20, Rule 8(b)(5).
\87\ See proposed CHX Article 20, Rule 6(d).
\88\ See proposed CHX Article 20, Rule 4(a)(7)(d); see also
proposed CHX Article 20, Rule 4(a)(7)(e).
\89\ See proposed CHX Article 20, Rule 5, Interpretation and
Policy .01(h).
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In Amendment No. 2, the Exchange also made certain changes intended
to clarify the meaning of the proposed rules. These changes include a
change in the definition of NBBO to confirm that, as of the Trading
Phase Date of Regulation NMS, this term relates only to protected bids
and offers; \90\ the addition of language that confirms that non-
regular way crosses can execute within a penny of other orders in the
Matching System; \91\ and a change that notes that, in the last
``refresh'' of a reserve size order, the number of shares may be less
than the original number of displayed shares because that is all that
is left.\92\ Other similar changes clarify the execution of benchmark
orders; \93\ confirm the handling of BBO ISO orders; \94\ and state,
with regard to relevant provisions, that they take effect on the
Trading Phase Date of Rule 611 of Regulation NMS.\95\
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\90\ See proposed CHX Article 1, Rule 1(o).
\91\ See proposed CHX Article 20, Rule 4(a)(7)(b) (recognizing,
as already expressed in the definition of this type of order, that
non-regular way cross orders execute without regard to orders in the
Matching System, because all orders in the Matching System are for
regular-way settlement).
\92\ See proposed CHX Article 20, Rule 4(b)(20).
\93\ See proposed CHX Article 20, Rule 4(b)(2) (confirming that
benchmark orders must be executed in increments permitted by Article
20, Rule 4(a)(7)(b)). The Exchange also elaborated on its reasoning
in proposing that benchmark orders only be permitted to be submitted
to the Matching System by institutional brokers, and noted that
other participants seeking to execute benchmark orders on the
Exchange could do so through an institutional broker.
\94\ See proposed CHX Article 20, Rule 4(b)(1) (confirming that
BBO ISO orders will be displayed in the circumstances set out in the
rule because the participant routing the order to the Matching
System has already satisfied the quotations of other markets as
required by Article 20, Rule 6(c)(3)).
\95\ See, e.g., proposed CHX Article 20, Rules 4(b)(1), (2),
(14), (18) and (19); see also proposed CHX Article 1, Rule 1(y)
(defining the ``Trading Phase Date'' as February 5, 2007).
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In Amendment No. 2, the Exchange also made changes to Article 16
governing market makers. The Exchange revised the rules to prohibit an
individual from registering both as a market maker trader and an
institutional broker representative.\96\ The Exchange also modified the
rules to provide that market makers may only trade on a proprietary
basis on the Exchange, and if a market maker handles agency orders off
of the Exchange, it must create and enforce information barrier
procedures pursuant to CHX Article 16, Rule 9.\97\
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\96\ See proposed CHX Article 16, Rule 1, Interpretation and
Policy .01.
\97\ See proposed CHX Article 16, Rule 1, Interpretation and
Policy .02.
---------------------------------------------------------------------------
Pursuant to an exemption recently issued by the Commission,\98\ the
Exchange proposed further provisions in Amendment No. 2 to permit
``qualified contingent trades'' to be executed on the Exchange.\99\ The
Exchange asserts that these trades would meet the requirements of the
Commission's order exempting from Rule 611(a) any trade-throughs caused
by the execution of an order involving one or more NMS stocks that are
components of a ``qualified contingent trade,'' as defined in the
Commission's exemptive order.\100\
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\98\ See Securities Exchange Act Release No. 54389 (August 31,
2006), 71 FR 52829 (September 7, 2006) (``Qualified Contingent Trade
Exemptive Order'').
\99\ See proposed CHX Article 1, Rule 2(bb) and proposed CHX
Article 20, Rule 5, Interpretation and Policy .01(i).
\100\ See Qualified Contingent Trade Exemptive Order, supra note
98.
---------------------------------------------------------------------------
The Exchange also added provisions requiring it to establish and
maintain information barriers to restrict the flow of information
between the Exchange (including its facilities) and the third-party
broker-dealer providing connectivity to other trading centers, and, to
the extent such third-party broker-dealer receives such information,
that adequately restrict the use of such
[[Page 59569]]
information by the third party broker-dealer to legitimate business
purposes necessary to provide routing connectivity and to serve as a
``give-up.'' Further, in Amendment No. 2, the Exchange revised its rule
text to reflect recent changes made to Exchange rules by other proposed
rule changes that have been recently approved by the Commission.\101\
---------------------------------------------------------------------------
\101\ In particular, the Exchange revised the proposed rule text
to reflect changes to the Exchange's disciplinary rules made in SR-
CHX-2005-06, see Securities Exchange Act Release No. 54437
(September 13, 2006), 71 FR 55037 (September 20, 2006); and to
reflect changes to the Exchange's rules made in SR-CHX-2006-23,
confirming that each participant firm only needs one trading permit
to conduct business on the Exchange, see Securities Exchange Act
Release No. 54494 (September 25, 2006).
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III. Discussion and Commission Findings
After careful review, 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 \102\ and, in particular, the requirements of
Section 6 of the Act \103\ and the rules and regulations thereunder.
The Commission finds that the proposed rule change, as amended, is
consistent with Section 6(b)(5) of the Act,\104\ which requires that
the rules of an exchange be designed, among other things, to prevent
fraudulent and manipulative acts and practices, 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.
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\102\ The Commission has considered the proposed rule's impact
on efficiency, competition and capital formation. 15 U.S.C. 78c(f).
\103\ 15 U.S.C. 78f.
\104\ 15 U.S.C. 78f(b)(5).
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A. The Matching System
The Matching System would allow participants to route orders to it
from any location for possible immediate execution through any
communications line approved by the Exchange.\105\ The adoption of the
Exchange's proposed rules, which feature the Matching System as the
core facility of the Exchange, will fundamentally change the Exchange's
current market structure from a substantially floor-based auction
market to an all-electronic one. The Commission believes that by
allowing electronic access to Exchange liquidity, the proposed new
model should help perfect the mechanism of a free and open market by
providing investors with a more efficient mechanism to have their
orders executed on the Exchange.
---------------------------------------------------------------------------
\105\ See proposed CHX Article 20, Rule 8(a)(1).
---------------------------------------------------------------------------
The Commission also believes that the Exchange's new trading model
should facilitate securities transactions by providing investors with
faster and more efficient access to the trading interest reflected in
the Exchange's published quotation, as well as interest away from the
Exchange BBO. Finally, the Commission believes that the Exchange's
proposal should enhance the opportunity for a customer's order to be
executed without dealer participation, consistent with the goals of
Section 11A of the Act.\106\
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\106\ See Section 11A(a)(1)(C) of the Act, 15 U.S.C. 78k-
1(a)(1)(C).
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1. Eligible Orders and Order Types
Under the proposed rule change, participants would be permitted to
submit orders to the Matching System that are day orders, limit orders,
and orders for regular way settlement (as well as certain other
excepted types of orders such as IOC market orders and non-regular way
crosses) and generally would be permitted to submit orders as round
lots, odd lots, or mixed lots.\107\ The proposed rules require that
orders submitted to the Matching System must meet the requirements of
Rule 612 of Regulation NMS, unless an exemption therefrom applies.\108\
As such, except for cross orders under certain circumstances as
discussed below,\109\ orders priced at or above $1.00 could not be
submitted to the Matching System in increments less than $0.01, and
orders priced less than $1.00 could not be submitted to the Matching
System in increments less than $.0001.\110\ The Commission believes
that these order eligibility requirements are consistent with the Act.
---------------------------------------------------------------------------
\107\ See supra notes 9-10 and accompanying text.
\108\ 17 CFR 242.612.
\109\ See infra note 124 and accompanying text.
\110\ See proposed CHX Article 20, Rule 4(a)(5).
---------------------------------------------------------------------------
The Exchange proposes to permit the Matching System to accept a
wide variety of order types. These order types include: immediate or
cancel limit and market orders, fill or kill orders, sell short and
short exempt orders, reserve size orders, time in force orders, cancel
on halt orders, do-not-display orders, do-not-route orders, various
types of cross orders, and various types of ISOs.\111\ Many of these
order types exist in the Exchange's current rules set, while others
have been proposed exclusively for use in the new trading model or for
use as of the Trading Phase Date of Regulation NMS. The Commission
believes that these order types should provide Exchange participants
greater flexibility in reaching their trading and investment
objectives. The Commission notes that a number of the proposed order
types will have different definitions prior to and following the
Trading Phase Date of Regulation NMS, which should enable users to make
use of the trading strategies of such order types immediately, as well
as after the Trading Phase Date.
---------------------------------------------------------------------------
\111\ See supra Section II.A.1.
---------------------------------------------------------------------------
As noted, the Exchange has proposed a number of cross order types
for use in the Matching System. The Commission notes that the cross
order is already permitted in the Exchange's electronic book.\112\ A
cross order would be immediately executed in the Matching System if it
is priced better than the Matching System's displayed BBO and, for
securities listed on any exchange other than Nasdaq (and for Nasdaq-
listed securities, as of the Trading Phase Date of Regulation NMS),
equal to or better than the NBBO.\113\ Similarly, a form of the cross
with size order is already permitted in the Exchange's electronic
book.\114\ Under the proposed rules, a cross with size will be required
to be larger than the aggregate size of all displayable orders
displayed on the Matching System at the cross price, consist of at
least 5,000 shares, and have a value of $100,000. The Commission notes
that it has previously approved a similar rule at another
exchange.\115\
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\112\ See current CHX Article XXA, Rule 2.
\113\ See proposed CHX Article 20, Rule 4(b)(4) and supra note
18.
\114\ See current CHX Article XXA, Rule 2.
\115\ See Rules of the National Stock Exchange, Inc., Rule
11.12.
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The Exchange is also proposing several completely new cross order
types that would be accepted by the Matching System, such as cross with
satisfy \116\ and cross with yield orders.\117\ The Commission believes
that these cross orders may provide an efficient means to allow
participants to effect cross transactions in the Matching System,
consistent with the Exchange's other priority and trade-through rules,
in circumstances where a cross order would otherwise be unable to be
executed and would be cancelled. A cross with satisfy order would
contain an instruction to execute orders already displayed in the
Matching System at their limit prices (up to a specified number of
shares) to the extent necessary to allow the cross transaction to occur
or to route outbound orders or commitments to other market centers to
the extent necessary to prevent an
[[Page 59570]]
improper trade-through.\118\ Once the satisfying execution has
occurred, the cross order would be executed at a price that is better
than the Matching System's displayed BBO and, for securities listed on
any exchange other than Nasdaq (and for Nasdaq-listed securities, as of
the Trading Phase Date of Regulation NMS), equal to or better than the
NBBO.
---------------------------------------------------------------------------
\116\ See supra note 20.
\117\ See supra note 21.
\118\ See proposed CHX Article 20, Rule 4(b)(5).
---------------------------------------------------------------------------
The cross with yield order is similar to the cross with satisfy,
and would contain 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.\119\
The cross order would then 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 any exchange other than Nasdaq (and for Nasdaq-
listed securities, as of the Trading Phase Date of Regulation NMS),
equal to or better than the NBBO.
---------------------------------------------------------------------------
\119\ See proposed CHX Article 20, Rule 4(b)(7).
---------------------------------------------------------------------------
The Matching System would also accept mid-point cross orders, which
would be executed at the midpoint of the NBBO.\120\ The Commission
notes that this order type has been previously approved for other
exchanges.\121\ The Exchange also proposes to permit a non-regular way
cross order, which would be for non-regular way settlement and would
execute without regard to the NBBO or any other orders in the Matching
System.\122\ The Commission notes that the Exchange has represented
that participants can currently execute orders for non-regular way
settlement in the Exchange's electronic book and on the floor of the
Exchange,\123\ but this cross order type would be the only means to
effectuate this type of transaction within the Matching System.
---------------------------------------------------------------------------
\120\ See supra note 22.
\121\ See, e.g., NYSE Arca Equities Rule 7.31(y).
\122\ See supra note 25.
\123\ See current CHX Article XX, Rule 9; CHX Article XXA, Rule
2(c)(5).
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Contingent upon the Exchange receiving exemptive relief from the
Commission, the Exchange proposes to allow all cross orders to be
submitted to the Matching System in sub-penny increments as small as
$.000001, regardless of their price.\124\ Although participants would
be permitted to submit crosses in sub-penny increments, the Exchange
proposes that cross orders (except for a midpoint cross, non-regular-
way cross or cross with size) would be required to be priced at least
$.01 better than any order on the same side of the Matching System (or,
for orders priced less than $1.00, at least $.0001 better than any
order on the same side of the Matching System).
---------------------------------------------------------------------------
\124\ See proposed CHX Article 20, Rule 4(a)(7)(b) (stating that
the provision ``shall take effect upon the granting of exemptive
relief by the Commission'').
---------------------------------------------------------------------------
The Commission believes that the proposed rules relating to cross
transactions are consistent with the Act and offer participants
flexibility in executions which meet the specified requirements of each
type of cross. In addition, the Commission notes that proposed CHX
Article 9, Rule 17, which restricts trading ahead of customer orders,
would apply to the cross order types, except as noted in Interpretation
and Policy .06 of that rule with respect to cross with satisfy
orders.\125\
---------------------------------------------------------------------------
\125\ See proposed CHX Article 9, Rule 17.
---------------------------------------------------------------------------
The Exchange also proposes to permit the Matching System to accept
several order types modeled on the exceptions in Rule 611(b) of
Regulation NMS. The Matching System would accept various ISOs, which
would allow the Exchange to immediately execute such orders without
regard to other markets' protected quotations, a