Self-Regulatory Organizations; Chicago Stock Exchange , Inc.; Order Granting Approval to Proposed Rule Change Relating to Access to an After-Hours Trading Session

I. Introduction

On August 2, 1999, the Chicago Stock Exchange, Inc. (“CHX” or “Exchange”) submitted to the Securities and Exchange Commission (“SEC” or “Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) and Rule 19b-4 thereunder a proposed rule change relating to access to an after-hours trading session (“E-Session”). On September 28, 1999, the Exchange filed an amendment to the proposed rule change, proposing several technical amendments to the filing, including substituting the term “E-Session” for the term “night trading” and deleting all references to market makers.

The proposed rule change, as amended, was published for comment in the Federal Register on October 7, 1999. No comments were received on the proposal. This order approves the proposed rule change, as amended.

II. Description of the Proposal

The Exchange proposes to provide rules that govern access to the CHX trading floor (and related trading privileges) during an E-Session that operates after the Primary Trading Session and Post Primary Trading Session.

Under the proposed rules, a person or entity may access the E-Session through his or its own existing Exchange membership or by leasing the rights to a membership. The rights and privileges that can be leased for the E-Session will be limited to access rights to the trading floor during the E-Session in the capacity of a floor broker or co-specialist only (“E-Session trading privileges”). To lease the E-Session trading privileges of a membership, a person or entity would be required to register with and be approved by the Exchange as a member or member organization under the Exchange's Constitution and Rules. The lessee would not be entitled to sublease the privileges and rights and would not be able to vote such interest. Further, the lessee of the E-Session trading privilege will be required to provide proof of an agreement with a registered clearing firm that is approved by the Exchange and provide evidence that such clearing firm will guarantee the lessee's obligations for any and all losses incurred through his or its lease of the E-Session trading privileges. The lessee will be required to execute a lease agreement, which would be required to be approved by the Exchange.

With respect to lessors, the proposed rules would require that the lessor be either: (i) An Approved Lessor, as defined in Article I.A. of the Exchange rules; (ii) a member or member organization that leases its membership privileges to a lessee for the Primary Trading Session; or (iii) a member or member organization that owns a membership and uses the membership for his or its own purposes during the Primary Trading Session.

Finally, the proposed rules would permit the Exchange to terminate the E-Session trading privileges upon 30 days written notice if the Exchange determines that it is in the best interest of the Exchange.

III. Discussion

The Commission has reviewed carefully the CHX's proposed rule change and finds, for the reasons set forth below, that the proposal is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange, and in particular, with the requirements of section 6(b). In particular, the Commission finds the proposal, which sets forth access to the CHX's E-Session, is consistent with the Section 6(b)(5) requirements in that it is designed to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts, and, in general, to protect investors and the public.

Under the proposal, the Exchange will allow a person or entity to access the E-Session through his or its own existing Exchange membership, or by leasing the rights to a membership, and will limit the rights and privileges that can be leased for the E-Session to access rights to the trading floor during the E-Session as a floor broker or co-specialist only. Additionally, lessees will be required to register with and be approved by the Exchange as a member or member organization under the Exchange's Constitution and Rules, and will not be entitled to sublease the privileges and rights, nor will they be allowed to vote their interest. The Commission believes that the proposed limitations on access to the E-Session, coupled with the proposed restrictions on the rights of E-Session lessees, should prevent fraudulent and manipulative acts, by allowing the CHX to closely monitor the E-Session.

Additionally, the CHX proposes to require lessees to provide proof of an agreement with a registered clearing firm that is approved by the Exchange, and provide evidence that such clearing firm will guarantee the lessee's obligations for any and all losses incurred through his or its lease of the E-Session trading privileges. The Commission finds that this provision is consistent with section 6(b)(5) of the Act because these requirements should help to ensure that investors are adequately protected with regard to the clearing of trades, and that the Exchange has some recourse should the lessee fail to perform any other contractual obligations.

The Exchange has also proposed that the lessee be considered a “member” or “member organization” for purposes of federal securities laws, and the Exchange's Certificate of Incorporation, Constitution and Rules, except in certain circumstances set forth in the rules. The Commission finds that this requirement is consistent with section 6(b)(5) of the Act in that it should help to ensure that lessees participating in the E-Session are subject to the same standards and requirements as are participants in the Primary Trading Session and the Post Primary Trading Session. This proposed requirement also should help to ensure that participants in all three trading sessions are treated equally.

Finally, the Commission believes that the proposed provision which permits the Exchange to terminate the E-Session trading privileges if the Exchange determines that it is in the best interests of the Exchange, is consistent with section 6(b)(5) of the Act in that it is designed to specifically allow the Exchange, if necessary, to take action to protect investors.

IV. Conclusion

IT IS THEREFORE ORDERED, pursuant to section 19(b)(2) of the Act, that the proposed rule change, as amended (SR-CHX-99-08), is approved.