Order Granting Accelerated Approval and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 1 to Proposed Rule Change re: Price Improvement for Securities That Trade in Minimum Variations of 1/64th of $1.00
SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-42565; File No. SR-CHX-99-24)
March 22, 2000
Self-Regulatory Organizations; Order Granting Accelerated Approval and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 1 to Proposed Rule Change by the Chicago Stock Exchange, Inc. Relating to Price Improvement for Securities that Trade in Minimum Variations of 1/64th of $1.00
On October 20, 1999, 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 Article XX, Rule 37, of the Exchange's rules relating to price improvement. The proposed rule change was published for comment in the Federal Register on February 28, 2000.3 On March 21, 2000, the Exchange filed Amendment No. 1 to the proposal.4 The Commission received no comments on the proposal. This order approves the proposal, as amended, on an accelerated basis.
II. Description of the Proposal
The Exchange proposes to amend Article XX, Rule 37, of the Exchange's rules, governing price improvement, to add section 37(g) to provide for an algorithm for price improvement for issues trading in minimum variations of 1/64th of $1.00. The primary purpose of the proposed rule change is to afford specialists a viable means of offering customers price improvement for securities that trade in minimum variations of 1/64th.
Presently, three existing CHX programs within the MAX system, SuperMAX, Enhanced SuperMAX and SuperMAX Plus, use computerized algorithms to provide automated price improvement. These programs were created for securities that trade in minimum variations of 1/16th to provide for price improvement of 1/16th of a point when the spread is 1/8th or greater. Specialist participation in all three of these programs is voluntary. Each of these price improvement programs were approved by the Commission on a permanent basis.5 Under this proposal, the CHX would add a fourth voluntary program, Derivative SuperMAX, within the MAX system to provide for price improvement for securities trading in minimum variations of 1/64th .6 The addition of the proposed price improvement algorithm for Derivative SuperMAX should enhance the ability of CHX specialists to offer customers price improvement for all securities at the minimum increment, even those securities that trade in 1/64th increments.
Under Derivative SuperMAX, which would be available only for those securities trading in minimum variations of 1/64th of $1.00, small agency market orders (i.e., orders from 100 shares up to and including 500 shares (or such greater amount designated by the specialist and approved by the Exchange)) would be eligible for price improvement if the market for the security is quoted with a spread of 1/16th of a point or greater. The new algorithm would provide 1/64th of a point price improvement from the ITS BBO. Specialist participation in the Derivative SuperMAX would be on a security-by-security basis and would be limited to securities that trade in minimum variations of 1/64th of $1.00.
The addition of Derivative SuperMAX would become operative shortly after Commission approval of this proposed rule change, on a date to be determined by the Exchange.7
III. Solicitation of Comments
Interested persons are invited to submit written data, views and arguments concerning Amendment No. 1, including whether Amendment No. 1 is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington D.C. 20549-0609. 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 at the Commission's Public Reference Room. Copies of such filing will also be available for inspection and copying at the principal office of the CHX. All submissions should refer to File No. SR-CHX-99-24 and should be submitted by [insert date 21 days from date of publication].
IV. Commission Findings and Order Granting Accelerated Approval of the Proposed Rule Change
After careful review, the Commission finds that the proposed rule change is consistent with the Act and the rules and regulations under the Act applicable to a national securities exchange.8 Specifically, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act9 which requires that the rules of an exchange be designed, among other things, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments and to perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.
The Commission believes that the Derivative SuperMAX price improvement algorithm should provide investors a meaningful opportunity for price improvement when securities trading in 1/64th increments have a spread of 1/16th point or greater. The Commission believes that, because the opportunity for price improvement is automatic and without any specialist intervention, Derivative SuperMAX could facilitate order interaction and enhance customer orders consistent with Section 6(b)(5) of the Act.10 The Commission notes that while Derivative SuperMAX is a voluntary program that specialists may choose to participate in for Dual Trading System issues,11 providing a greater number of investors an opportunity to achieve price improvement is compatible with the views on best execution expressed in the Order Handling release.12
The Commission finds good cause for approving the proposed rule change prior to the thirtieth day after the date of publication of notice of the proposal in the Federal Register because in Amendment No. 1 to the proposal the Exchange has asserted that it is able to activate the price improvement algorithm within one day of Commission approval. Further, the Commission believes that the proposal's price improvement algorithm should enhance the CHX's ability to compete with other market centers that trade the same securities that trade at the Exchange in minimum increments of 1/64th , which in turn should benefit customers. Finally, the Commission notes that it expects the Exchange to submit proposed rule changes for all four MAX price improvement algorithms, pursuant to Section 19(b)(3)(A) of the Act,13 to clarify the interpretation and operation of the pricing algorithms once securities are quoted and traded in decimals.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,14 that the proposed rule change (File No. SR-CHX-99-24), as amended, be approved.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.15
Jonathan G. Katz
115 U.S.C. 78s(b)(1).
217 CFR 240.19b-4.
3Securities Exchange Act Release No. 42442 (February 18, 2000), 5 FR 10575.
4See letter from Paul B. O'Kelly, Executive Vice President, Market Regulation and Legal, CHX to Katherine A. England, Assistant Director, Division of Market Regulation, Commission, dated March 21, 2000. ("Amendment No. 1"). In Amendment No. 1, the CHX confirmed its readiness and intention to activate the price improvement algorithm described in this proposal within one day following the Commission's approval of this proposed rule change. The CHX also indicated that it intended to implement the proposal as soon as practicable in order to remain competitive with other market centers that trade the securities that trade at the CHX in minimum increments of 1/64th. Finally, the CHX noted that approximately 88% of the trades in such securities are for 599 shares or less.
5See Securities Exchange Act Release Nos. 40017 (May 20, 1998), 63 FR 29277 (May 28, 1998) and 40235 (July 17, 1998), 63 FR 40147 (July 27, 1998) (File No. SR-CHX-98-9)(orders approving revised SuperMAX and Enhanced SuperMAX algorithms); 41480 (June 4, 1999), 64 FR 32570 (June 17, 1999)(order approving revised SuperMAX Plus algorithm).
6Presently, only securities derivative equity products trade in a minimum increment of 1/64th on the Exchange. However, the Derivative SuperMAX algorithm is not limited to derivative products, thus non-derivative securities traded in 1/64th increments on the Exchange in the future would be eligible for price improvement under this proposal. Telephone conversation between Paul B. O'Kelly, Executive Vice President, Market Regulation and Legal, CHX, and Marc McKayle, Attorney, Division, Commission on March 20, 2000.
7See Amendment No. 1, note 4, above.
8In approving this proposed rule change, the Commission notes that it has considered the proposed rule's impact on efficiency, competition, and capital formation.
915 U.S.C. 78f(b)(5).
1015 U.S.C. 78f(b)(5).
11Dual Trading issues are issues traded on the CHX, either through listing on the CHX or pursuant to unlisted trading privileges, and are also listed on either the New York Stock Exchange or the American Stock Exchange.
12See Securities Exchange Act Release No. 37619A (September 6, 1996), 61 FR 48290 (September 12, 1996).
1315 U.S.C. 78s(b)(3)(A).
1415 U.S.C. 78s(b)(2).
1517 CFR 200.30-3(a)(12).