[Federal Register Volume 79, Number 186 (Thursday, September 25, 2014)]
[Notices]
[Pages 57603-57624]
[FR Doc No: 2014-22787]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73150; File No. SR-CHX-2014-15]

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Adopt the CHX Routing Services

September 19, 2014.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that on September 8, 2014, the Chicago Stock Exchange, Inc. (``CHX'' or
the ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    CHX proposes to adopt and amend rules to implement the CHX Routing
Services. The text of this proposed rule change is available on the
Exchange's Web site at (www.chx.com) and in the Commission's Public
Reference Room.

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

    In its filing with the Commission, the CHX included statements
concerning the purpose of and basis for the proposed rule changes and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The CHX has prepared summaries, set forth in sections A,
B and C below, of the most significant aspects of such statements.

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

1. Purpose
    The Exchange proposes to adopt and amend rules to implement the
proposed CHX Routing Services. Specifically, the Exchange proposes to
permit Routable Orders \4\ to be routed away from the CHX Matching
System (``Matching System'') for executions at away Trading Centers
(``routing destination''),\5\ if a Routing Event \6\ is triggered. The
proposed CHX Routing Services would be provided through CHXBD, LLC
(``CHXBD''), which is an affiliated broker-dealer that will operate as
a facility of the Exchange. All orders routed away from, and related
executions within, the Matching System would be done in a manner
compliant with Exchange rules and federal securities laws and
regulations, including Regulation NMS and Regulation SHO. Incidentally,
the Exchange also proposes to amend the operation of certain order
modifiers and price sliding functionalities that will be impacted by
the proposed CHX Routing Services, including the CHX Only and LULD
Price Sliding functionalities and Do Not Display modifier, and clarify
how orders are ranked, displayed and executed by the Matching System.
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    \4\ As discussed below, proposed Article 1, Rule 1(oo) defines
``Routable Order'' as ``any incoming Limit order, as defined under
Article 1, Rule 2(a)(1), of any size, not marked by any order
modifiers or related terms listed under Article 1, Rule 2 that
prohibit the routing of the order to another Trading Center.'' By
definition, orders resting on the CHX book are never routable.
    \5\ Proposed Article 1, Rule 1(nn) defines ``Trading Center'' as
it is defined under Rule 600(b)(78) under Regulation NMS.
    \6\ As discussed below, proposed Article 19, Rule 3(a) lists
three Routing Events, any of which may cause an order to be routed
away pursuant to the proposed CHX Routing Services.
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    The Exchange believes that the proposed CHX Routing Services and
related amendments will benefit market participants by providing a
routing functionality that would increase the likelihood of executions
resulting from Routable Orders submitted to the Matching System.
Consequently, the proposed CHX Routing Services and

related amendments to modifiers and price sliding functionalities will
reduce the number of order cancellations and improve fill rates on
orders submitted to the Matching System, which will, in turn, enhance
and streamline the national market system by promoting executions
within and without the Matching System.
Background
    Current CHX Article 20 (Operation of the Matching System) provides
routing rules that were adopted when the Exchange migrated to its all-
electronic trading model in 2006.\7\ However, the Exchange has never
provided outbound routing of orders from the Matching System. In sum,
these current routing rules contemplate a routing functionality largely
based on the current routing of orders from Brokerplex through the
Order Management System (``OMS''), which is fundamentally different
from the proposed CHX Routing Services.\8\ The following highlight the
key differences between the current routing rules and the proposed CHX
Routing Services:
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    \7\ See Securities Exchange Act Release No. 54550 (September 29,
2006), 71 FR 59563 (October 10, 2006) (SR-CHX-2006-05).
    \8\ See CHX Article 17, Rule 5(e). Brokerplex is an order
sending facility of the Exchange distinct and separate from the
Matching System. At the request of the Participant, orders may be
routed from Brokerplex through the OMS to the Matching System or to
any other Trading Center with which the Participant order sender has
precedent access. The Exchange does not place itself between
Brokerplex and the away Trading Center.
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    (1) Unlike the proposed CHX Routing Services, the current routing
rules contemplate a routing functionality requiring Participants to
enter into numerous agreements, including one with a non-affiliated
third-party routing broker directly (``third-party routing
broker'').\9\ In contrast, the proposed CHX Routing Services do not
involve Participants entering into any agreements with, or submitting
any orders directly to, the routing brokers associated with the CHX
Routing Services, including CHXBD. As discussed in detail below, the
proposed CHX Routing Services involve the routing of corresponding
orders related to Routable Orders submitted to the Matching System,
from the Matching System, through CHXBD, to a third-party routing
broker. This third-party routing broker would then submit the order to
a routing destination for execution directly, or through another non-
affiliated third-party routing broker.\10\
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    \9\ See Interpretation and Policy .03(b) of CHX Article 20, Rule
5; see also Interpretation and Policy .03(1) of CHX Article 20, Rule
8.
    \10\ At initial operation of the proposed CHX Routing Services,
CHXBD will utilize one third-party routing broker to clear and
submit trades for execution on behalf of the Exchange. The same
third-party routing broker will maintain a CHXBD Error Account on
behalf of CHXBD for the purpose of liquidating Error Positions,
pursuant to proposed Article 19, Rule 2(a)(7). The same third-party
routing broker will also liquidate such positions, pursuant to
proposed Article 19, Rule 2(a)(8)(D). The proposed rules do not
prohibit the Exchange from utilizing two or more third-party routing
brokers in connection with the proposed CHX Routing Services.
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    (2) Unlike the proposed CHX Routing Services, the current routing
rules only contemplate the routing of orders directly away from the
Matching System where such orders would execute in violation of Rule
611 of Regulation NMS and/or display in violation of Rule 610(d) of
Regulation NMS.\11\ In contrast, the proposed CHX Routing Services
include additional Routing Events that would also result in routing of
Routable Orders away from the Matching System.
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    \11\ See Interpretation and Policy .03 of CHX Article 20, Rule
5.
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    (3) Unlike the proposed CHX Routing Services, the current routing
rules contemplate routing of orders that are rejected from the Matching
System.\12\ In contrast, the proposed CHX Routing Services only involve
routing of Routable Orders from the Matching System and Routable Orders
that have been rejected from the Matching System are not eligible for
the proposed CHX Routing Services.
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    \12\ See CHX Article 20, Rule 8(h); see also Interpretation and
Policy .03 of CHX Article 20, Rule 8.
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    Given these fundamental differences between the current routing
rules and the proposed CHX Routing Services, the Exchange now proposes
to delete current Interpretation and Policy .03 of Article 20, Rule 5;
Article 20, Rule 8(h); and Interpretation and Policy .03 of Article 20,
Rule 8. In lieu of these current rules, the Exchange proposes to adopt
or amend the following rules.
Proposed Article 19 (Operation of the CHX Routing Services)
    The Exchange proposes to list all rules concerning the ``Operation
of the CHX Routing Services'' under Article 19, which is currently
reserved. Thereunder, the Exchange proposes to adopt Rule 1 (CHX
Routing Services), Rule 2 (Routing Brokers), and Rule 3 (Routing
Events).
Proposed Article 19, Rule 1 (CHX Routing Services)
    Proposed Rule 1 (CHX Routing Services) provides a general overview
of the scope of the proposed CHX Routing Services. Specifically,
proposed Rule 1(a) states as follows:
    (a) Generally. Routable Orders that have been submitted to, and
accepted by, the Matching System may be routed from the Matching System
to other Trading Centers pursuant to this Article 19 and in a manner
that is compliant with other Exchange rules and all securities laws and
regulations, including, but not limited to, Regulation NMS and
Regulation SHO; provided that the Exchange's routing-related systems
and facilities are enabled and operational.
    Pursuant to proposed Article 1, Rule 2(oo),\13\ a ``Routable
Order'' is an incoming limit order of any size, regardless of the
attached order display modifier (i.e., fully-displayable if no display
modifier is attached, Reserve Size or Do Not Display); provided that
such an order is not attached with at least one order modifier listed
under Article 1, Rule 2 that explicitly or implicitly precludes
routing.\14\ Once a Routable Order comes to rest on the CHX book, it is
no longer considered a Routable Order as the proposed CHX Routing
Services will never route away resting orders. Moreover, the proposed
CHX Routing Services involve the routing of Routable Orders from the
Matching System. Routable Orders that have not been accepted by the
Matching System (i.e., rejected or never submitted) or have been
accepted by the Matching System, but cancelled back to the Participant
order sender, are not eligible for the proposed CHX Routing
Services.\15\ Thus, the proposed CHX

Routing Services can be distinguished from the current routing of
orders directly from Brokerplex, pursuant to current Article 17, Rule
5(e).\16\
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    \13\ See supra note 4.
    \14\ If any one of the following order modifiers are attached to
a limit order, the order shall not be eligible for routing: ``BBO
ISO,'' as defined under paragraph (b)(1)(A); ``CHX Only,'' as
defined under paragraph (b)(1)(C); ``Post Only,'' as defined under
paragraph (b)(1)(D); ``Price Penetrating ISO,'' as defined under
paragraph (b)(1)(E); ``Do Not Route,'' as defined under paragraph
(b)(3)(A); ``ISO,'' as defined under paragraph (b)(3)(B); ``Sell
Short,'' as defined under paragraph (b)(3)(D), if the short sale
price test restriction of Rule 201 under Regulation SHO is in effect
for the relevant security and the order is not marked ``Short
Exempt,'' as defined under paragraph (b)(3)(E); ``Fill Or Kill,'' as
defined under paragraph (d)(2); and ``Immediate Or Cancel,'' as
defined under paragraph (d)(4). Cross and Market orders are not
routable as they are always treated by the Matching System as
Immediate Or Cancel. See CHX Article 1, Rules 2(a)(2) and (3). All
Routable Orders shall be marked for Regular Way Settlement, as only
Cross orders can be for Non-Regular Way Settlement. See CHX Article
1, Rule 2(e)(1).
    \15\ An order ``rejected'' by the Matching System is different
than order ``cancelled'' by the Matching System. While both an order
rejection and cancellation would result in the order being sent back
to the Participant who submitted the order, generally speaking, an
order is ``rejected'' by the Matching System if the order could not
be accepted by the Matching System and ``cancelled'' by the Matching
System only after it had been accepted by the Matching System.
    \16\ See supra note 8.
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    Proposed Rule 1(b) states as follows:
    (b) Limitation of liability. Use of the CHX Routing Services is
optional and subject to the Exchange's limitation of liability,
pursuant to Article 3, Rule 19.
    The purpose of this language is to make clear that the Exchange's
absolute limitation of liability applies to the use of the proposed CHX
Routing Services. Consequently, the Exchange will not provide any
compensation to Participants for any alleged losses incurred due to use
of the proposed CHX Routing Services.
    Proposed Rule 1(c) states as follows:
    (c) Firm orders. Routable Orders submitted to the Matching System
are firm orders, pursuant to Article 20, Rule 3, and Participants that
submit Routable Orders agree to be bound by all resulting executions,
including the execution of routed orders at other Trading Centers.
Routed orders received by another Trading Center shall be subject to
the rules and procedures of that Trading Center.
    This language expands the firm order rule of current Article 20,
Rule 3 (Firm Orders) to include all orders, regardless of whether the
order is executed within the Matching System or at another Trading
Center.\17\ It also clarifies that routed orders received by another
Trading Center are subject to the rules of the away Trading Center,
which means, inter alia, that CHX rules concerning order handling do
not apply to routed orders while they are away from the Exchange and
its facilities.
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    \17\ CHX Article 20, Rule 3 applies specifically to ``executions
within the Matching System.''
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Proposed Article 19, Rule 2 (Routing Brokers)
    Proposed Rule 2 (Routing Brokers) details rules concerning routing
brokers connected with the proposed CHX Routing Services. Currently,
CHXBD is the only broker-dealer affiliated with the Exchange. As such,
proposed paragraph (a) details operational and governance rules
concerning CHXBD, which begins as follows:
    (a) CHXBD, LLC as Outbound Router. The Exchange shall provide the
CHX Routing Services through CHXBD, LLC (``CHXBD''), which is an
affiliated broker that operates as a facility of the Exchange. CHXBD
shall utilize one or more non-affiliated third-party brokers-dealers
(``third-party routing brokers'' and together with CHXBD ``routing
brokers'') in connection with the CHX Routing Services to route orders
to away Trading Centers. CHXBD shall only accept routing-related
instructions from the Exchange to route orders to away Trading Centers
and shall not accept routing instructions from Participants or other
non-Participants directly. Thus, the Exchange will determine the logic
that provides, when, how, and where orders are routed away. Routing
brokers cannot change the terms of an order or the routing
instructions, nor do the routing brokers have any discretion about
where to route an order. The Exchange shall report and allocate
executions or report cancellations of routed orders at the away Trading
Centers to the Participants that submitted the Routable Orders and to
Qualified Clearing Agencies. Neither the Exchange nor CHXBD shall have
responsibility for the handling of the routed order by the away Trading
Center.
    At initial operation, CHXBD will operate as an ``introducing
broker-dealer,'' which means that CHXBD shall not be permitted to hold
customer funds nor execute or clear trades.\18\ Instead, the clearing
functions of the proposed CHX Routing Services will be handled by a
third-party routing broker, which will, pursuant to specific agreements
entered into between each third-party routing broker and CHXBD (e.g.,
carrying agreement pursuant to FINRA Rule 4311), carry a customer
account, submit orders, and clear trades.\19\ CHXBD shall not engage in
any proprietary trading, except that a third-party routing broker shall
liquidate Error Positions in the CHXBD Error Account, pursuant to
proposed Article 19, Rule 2(a)(7), as discussed below.\20\
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    \18\ See FINRA Rule 7310(d).
    \19\ See supra note 10.
    \20\ Id.
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    As an introducing broker-dealer, the Exchange submits that CHXBD
does not have market access obligations, pursuant to Rule 15c3-5 under
the Act \21\ nor does it have reporting obligations pursuant to Rule
606 of Regulation NMS. Specifically, since CHXBD does not directly
submit orders to any exchange or alternative trading system (``ATS'')
for execution and does not operate an ATS, it does not have ``market
access'' as defined by Rule 15c3-5(a)(1) under the Act.\22\ Instead,
market access obligations will be handled ``upstream'' by Participants
that submit orders to the Matching System and ``downstream'' by third-
party broker dealers that submit orders on behalf of the Exchange to
routing destinations. Moreover, since CHXBD will not have discretion as
to where a corresponding routing order is to be routed, the Exchange
believes that CHXBD has no reporting obligations pursuant to Rule 606
of Regulation NMS.
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    \21\ 17 CFR 240.15c3-5.
    \22\ 17 CFR 240.15c3-5(a)(1).
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    Mechanically, when the Exchange accepts a Routable Order in the
Matching System and a Routing Event, as described under proposed
Article 19, Rule 3, is triggered, the Exchange will provide CHXBD with
one or more ``corresponding routing orders'' and instructions to route
the order(s) consistent with the applicable Routing Event. As discussed
below, the routed portion of the Routable Order will enter a
``pending'' state in the Exchange's systems until an execution or
cancellation confirmation is received from the away routing destination
(``pending routed portion''). CHXBD will then route the corresponding
routing order(s) and instructions to a third-party routing broker, who
will then route the order(s) to the ultimate routing destination(s) for
execution.
    In the normal course, executions will be reported backwards through
the routing chain, ultimately to the Participant order sender by the
Exchange.\23\ In the case of cancellations of routed orders at away
routing destinations (``unexecuted remainders'') such unexecuted
remainders would be reported backwards through the routing chain to the
Exchange by CHXBD. Unexecuted remainders will only be cancelled back to
the Participant order sender if a cancel message is awaiting the
unexecuted remainder upon its return to the Matching System.
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    \23\ As discussed below, these execution and cancellation
confirmations will be utilized by the Exchange's routing systems to
determine how to treat pending routed portions awaiting away
execution(s).
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    In contrast, clearing submissions for routed orders executed at
away Trading Centers (``street-side trade'') will be submitted for
clearance and settlement in the name of the third-party routing broker
on behalf of the Exchange and the Exchange will, in turn, execute
corresponding non-tape clearing-only trade(s) with the Participant
order sender. As such, the sequence of non-tape clearing only trades
connecting the street-side trade with the Participant order sender will
never involve CHXBD. Thus, the Exchange, not CHXBD, will arrange for
any resulting securities positions to be delivered to the Participant
order sender that submitted the Routable Order to the Matching System.
Mechanically, upon receipt of an execution confirmation for a routed

order, the Exchange's systems will (1) automatically pair the execution
with the pending routed portion of the Participant order sender's
Routable Order that is resting on the Matching System and (2) report
that trade to a Qualified Clearing Agency for clearance and settlement
purposes by submitting a non-tape, clearing only report. In sum,
positions would be delivered from the ``street'' to the Exchange and
the Exchange would, in turn, deliver the positions to Participant order
senders.
    Proposed Rule 2(a) further provides that for so long as CHXBD is
affiliated with the Exchange and is providing outbound routing from the
Exchange to away Trading Centers, proposed paragraphs (a)(1) to (a)(7)
shall apply. Much of the proposed language is virtually identical to
the rules of other exchanges, such as NYSE, BATS Y-Exchange (``BYX''),
and Nasdaq.\24\ Proposed paragraphs (a)(1)-(a)(6) state as follows:
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    \24\ See NYSE Rule 17; see also BYX Rule 2.11; see also Nasdaq
Rule 4758(b).
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    (1) The Exchange will regulate CHXBD as a facility (as defined in
Section 3(a)(2) of the Act), subject to Section 6 of the Act.\25\ In
particular, and without limitation, under the Act, the Exchange will be
responsible for filing with the Commission rule changes and fees
relating to CHXBD and CHXBD will be subject to the Exchange's non-
discrimination requirements.
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    \25\ See 15 U.S.C. 78c(a)(2); see also 15 U.S.C. 78f.
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    (2) FINRA, a self-regulatory organization unaffiliated with the
Exchange or any of its affiliates, will carry out oversight and
enforcement responsibilities as the designated examining authority
designated by the Commission pursuant to Rule 17d-1 of the Act \26\
with the responsibility for examining CHXBD for compliance with
applicable financial responsibility rules.
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    \26\ 17 CFR 240.17d-1.
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    (3) Participants' use of CHXBD to route orders to away Trading
Centers will be optional. Participants that do not desire to use CHXBD
must designate orders entered into the Matching System as ``Do Not
Route'' or any other order modifier available through the Exchange that
is ineligible for routing. Any Participant that does not want to use
CHXBD may use other routers to route orders to away Trading Centers.
    (4) CHXBD will not engage in any business other than (A) its
outbound router function for the Exchange, (B) its usage of CHXBD Error
Accounts in compliance with paragraph (b)(7) below, and (C) any other
activities it may engage in as approved by the Commission.
    (5) The Exchange shall establish and maintain procedures and
internal controls reasonably designed to adequately restrict the flow
of confidential and proprietary information between the Exchange and
its facilities (including CHXBD as its routing facility) and any other
entity; or, where there is a third-party routing broker, the Exchange,
the routing facility and any third-party routing broker, and any other
entity, including any affiliate of the third-party routing broker (and
if the third-party routing broker or any of its affiliates engages in
any other business activities other than providing the routing services
to the Exchange, between the segment of the third-party routing broker
or affiliate that provides the other business activities and the
segment of the third-party routing broker that provides the routing
services).
    (6) The books, records, premises, officers, agents, directors and
employees of CHXBD as a facility of the Exchange shall be deemed to be
the books, records, premises, officers, agents, directors and employees
of the Exchange for the purposes of, and subject to oversight pursuant
to, the Act. The books and records of CHXBD as a facility of the
Exchange shall be subject at all times to inspection and copying by the
Exchange and the Commission. Nothing in these Rules shall preclude
officers, agents, directors or employees of the Exchange from also
serving as officers, agents, directors and employees of CHXBD.
    With respect to proposed paragraph (a)(3), by submitting a Routable
Order to the Matching System, a Participant is electing to utilize the
proposed CHX Routing Services. If a Participant does not wish for an
order to be routed, the order submitted to the Matching System must not
be a Routable Order, which is achieved by attaching any order modifier
to the order that is ineligible for routing, including, but not limited
to, Do Not Route.\27\ Thus, the CHX Routing Services is optional in
that a Participant may elect not to submit a Routable Order to the
Matching System. Once a Routable Order is submitted to the Matching
System, however, the CHX Routing Services would be the only option
through which an order could be routed away directly from the Matching
System, without an intervening order cancellation.\28\ If a Participant
wishes to utilize another routing option after submitting a Routable
Order to the Matching System, the Participant would have to cancel the
original order.
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    \27\ See supra note 14.
    \28\ See infra note 71.
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    With respect to proposed paragraph (a)(5), prior to becoming
operational, CHXBD will adopt policies and procedures related to the
handling of confidential and proprietary information, as required by
proposed paragraph (a)(5).
    Proposed paragraph (a)(7) details rules concerning Error Position
and, specifically, how Error Positions would be handled by the Exchange
and/or CHXBD. Proposed paragraph (a)(7) begins as follows:
    (7) CHXBD shall maintain a CHXBD Error Account for the purpose of
liquidating unpaired trade positions that are the result of an
execution or executions that are not clearly erroneous under Article
20, Rule 10 \29\ and result from a technical or systems issue at CHXBD,
the Exchange, a routing destination, or non-affiliated third-party
broker-dealers. (``Error Positions'').\30\
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    \29\ As defined under Article 20, Rule 10, a transaction
executed on the Exchange is ``clearly erroneous'' where there is an
obvious error in any term, such as price, number of shares or unit
of trading, or identification of the security.
    \30\ See supra note 10.
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    The proposed definition of ``Error Positions'' excludes clearly
erroneous transactions because clearly erroneous trades should be
cancelled pursuant to the clearly erroneous rules of the executing
exchange.
    Proposed subparagraph (A) states as follows:
    (A) CHXBD shall not accept any positions in a CHXBD Error Account
from an account of a Participant or permit any Participant to transfer
any positions from its account to a CHXBD Error Account; provided,
however, that CHXBD may accept into its CHXBD Error Account positions
erroneously allocated to Participants to the extent that the
alternatives listed under subparagraph (C) below have been exhausted or
are impracticable.
    Proposed subparagraph (A) provides a narrow exception from the
general prohibition against CHXBD accepting positions from
Participants. Specifically, the exception is narrowly tailored to the
improbable scenario where a systems or technical issue at the Exchange
would result in a position being erroneously allocated to a Participant
(e.g., an erroneous pairing of an execution confirmation with a pending
Routable Order). In such a situation, the erroneously allocated
position would have been an Error Position, but for the erroneous
allocation. The proposed exception would only apply to Error Positions
that could not otherwise be addressed

pursuant to proposed subparagraph (C), as discussed below. Given that
the Exchange does not provide Participants with the ability to file
claims for alleged losses, the Exchange submits that this narrow
exception is necessary and appropriate.\31\
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    \31\ Compare BYX Rule 11.16. In support of its absolute
prohibition on accepting error positions from its Members, BATS Y-
Exchange stated the following: To the extent a Member receives
locked-in positions in connection with a technical or systems issue,
that Member may seek to rely on BYX Rule 11.16 if it experiences a
loss. That rule provides Members with the ability to file claims
against the Exchange for ``losses resulting directly from the
malfunction of the Exchange's physical equipment, devices, and/or
programming or the negligent acts or omissions of its employees.''
See Exchange Act Release No. 69226 (June 12, 2013), 78 FR 36612
(June 18, 2013) (SR-BYX-2013-018) (``Notice'').
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    Proposed subparagraph (B) states as follows:
    (B) If a technical or systems issue on the Exchange or CHXBD
results in the Exchange not having valid clearing instructions for a
Participant to a trade, the Exchange may assume that Participant's side
of the trade so that the trade can be automatically processed for
clearance and settlement on a locked-in basis.
    This proposed language permits the Exchange to take a Participant's
side to an away execution where a systems or technical issue at the
Exchange or CHXBD results in the Exchange not having valid clearing
instructions for the Participant to the trade.\32\ Assuming that the
execution at the away Trading Center is valid, the Exchange would be
obligated to settle that execution. The resulting position would then
be liquidated pursuant to proposed subparagraph (D).\33\
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    \32\ As discussed above, CHXBD will operate as a facility of the
Exchange. Accordingly, pursuant to proposed CHX Article 19, Rule
2(a)(1), the Exchange is responsible for filing with the Commission
rule changes and fees relating to the functions of CHXBD. In
addition, the Exchange is using the phrase ``the Exchange or CHXBD''
in this rule filing to reflect the fact that a decision to take
action with respect to orders affected by a technical or systems
issue may be made in the capacity of CHXBD or the Exchange depending
on the circumstances of the issue. At initial operation, the
Exchange will use one or more non-affiliate third-party broker-
dealers to provide outbound routing services (i.e., third-party
routing brokers). Mechanically, orders will be submitted to the
third-party routing broker through CHXBD, which will act as an
introducing broker-dealer. The third-party routing broker will then
route the orders to the routing destination in its name, and any
executions will be submitted for clearance and settlement in the
name of the third-party routing broker on behalf of the Exchange, so
that any resulting positions are delivered to the Exchange upon
settlement. As described above, the Exchange would then normally
arrange for any resulting securities positions to be delivered to
the Participant that submitted the Routable Order to the Exchange.
If Error Positions (as defined in proposed CHX Article 19, Rule
2(a)(7)) result in connection with the Exchange's use of a third-
party routing broker for outbound routing, and those positions are
delivered to the Exchange through the clearance and settlement
process, the Exchange or CHXBD would be permitted to resolve those
positions in accordance with proposed CHX Article 19, Rule 2(a)(7).
If the third-party routing broker received Error Positions in
connection with its role as a routing broker for the Exchange, and
the Error Positions were not delivered to the Exchange through the
clearance and settlement process, then the third-party Routing
Broker would resolve the Error Positions itself and CHXBD would not
be permitted to accept the Error Positions, as set forth in proposed
CHX Article 19, Rule 2(a)(7)(A).
    \33\ See infra Example 6.
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    Proposed subparagraph (C) states as follows:
    (C) In connection with a particular technical or systems issue and
prior to accepting any resulting Error Positions into the CHXBD Error
Account, the Exchange or CHXBD shall, if practicable, -1- assign such
Error Positions to Participants in accordance with subparagraph (C)(i)
below; -2- cause to have any erroneous executions cancelled on the
Trading Centers on which they were executed; or -3- allocate Error
Positions to third-party routing brokers, if the technical or systems
issue occurred away from the Exchange and CHXBD. Error Positions that
could not be handled in this manner shall be taken into the CHXBD Error
Account and liquidated in accordance with subparagraph (D).
Determinations on how to treat Error Positions shall be made in a
nondiscriminatory manner.\34\
---------------------------------------------------------------------------

    \34\ Prior to becoming operational, CHXBD will adopt policies
and procedures designed to ensure that any determinations
considering how to treat Error Positions will be done in a manner
nondiscriminatory to our Participants.
---------------------------------------------------------------------------

    (i) The Exchange or CHXBD shall assign all Error Positions
resulting from a particular technical or systems issue to the
Participants affected by that technical or systems issue if the
Exchange or CHXBD:
    (1) Determines that it has accurate and sufficient information
(including valid clearing information) to assign the positions to all
of the Participants affected by that technical or systems issue;
    (2) Determines that it has sufficient time pursuant to normal
clearance and settlement deadlines to evaluate the information
necessary to assign the positions to all of the Participants affected
by that technical or systems issue; and
    (3) Has not determined to cancel all orders affected by that
technical or systems issue in accordance with Article 20, Rule 12.
    Although the CHXBD Error Account may be utilized to liquidate any
Error Positions, regardless of where the systems or technical issue
occurred, proposed subparagraph (C) requires three alternatives be
pursued, if practicable, prior to accepting a Error Position into the
CHXBD Error Account.\35\
---------------------------------------------------------------------------

    \35\ While the alternatives detailed under proposed subparagraph
(C) are being considered, Error Positions will not be transferred
into the CHXBD Error Account. See supra note 10.
---------------------------------------------------------------------------

    With respect to the allocation of unpaired positions pursuant to
proposed subparagraph (C)(i), a technical or systems issue of limited
scope or duration may occur at a routing destination and the resulting
trades may be submitted for clearance and settlement by such routing
destinations to a Qualified Clearing Agency. If there were a small
number of trades, there may be sufficient time to match positions with
Participant orders and avoid using the CHXBD Error Account. There may
be scenarios, however, where the Exchange or CHXBD determines that it
is unable to assign all Error Positions resulting from a particular
technical or systems issue to all of the affected Participants, or
determines to cancel all affected routed orders, pursuant to proposed
Article 20, Rule 12. For example, in some cases, the volume of
questionable executions and positions resulting from a technical or
systems issues might be such that the research necessary to determine
which Participants to assign those executions could be expected to
extend past the normal settlement cycle for such executions.
Furthermore, if a routing destination experiences a technical or
systems issue after CHXBD has transmitted IOC orders to it that prevent
CHXBD from receiving responses to those orders, the Exchange or CHXBD
may cancel/release all Routable Orders affected by the issue, pursuant
to proposed Article 20, Rule 12(b), as discussed below. In such a
situation, the Exchange or CHXBD would not pass on to the Participants
any executions on the routed orders subsequently received from the
routing destination. Thus, where Error Positions could not be assigned
to Participants, the Exchange would seek to either cancel the related
executions \36\ or have the third-party routing broker accept the
positions, prior to accepting Error Positions into the CHXBD Error
Account.
---------------------------------------------------------------------------

    \36\ Cancellations of executions that comprise an Error Position
would be effected pursuant to the rules of the executing venue.
---------------------------------------------------------------------------

    Pursuant to agreement between CHXBD and third-party routing
brokers, third-party routing brokers would typically be required to
accept Error Positions where the positions result from systems or
technical issues away

from the Exchange and CHXBD.\37\ If an Error Position gets erroneously
allocated to the Exchange's customer account, the Exchange would
require the third-party routing broker to take back the Error Position.
Thus, ideally, the CHXBD Error Account would only be used (1) to
liquidate Error Positions resulting from systems or technical issues at
the Exchange/CHXBD or (2) where a third-party routing broker is unable
to utilize its own error account to liquidate Error Positions resulting
from systems or technical issues away from the Exchange and CHXBD.
However, the Exchange recognizes that some Error Positions resulting
from systems or technical issues away from the Exchange/CHXBD may not
be taken by a third-party routing broker or may not be cancelled by the
executing routing destination and, as such, it is important that CHXBD
retain the discretion to take any Error Positions into the CHXBD Error
Account.\38\
---------------------------------------------------------------------------

    \37\ The Exchange believes it is reasonable and appropriate to
require such Error Positions to be addressed through the error
account of a third-party routing broker because, among other
reasons, it is the executing broker associated with these
transactions.
    \38\ To the extent that CHXBD incurred a loss in covering its
positions, short or long, and to the extent that the Error Position
resulted from a systems or technical issue at a third-party routing
broker or routing destination, it would submit a reimbursement claim
to the third-party routing broker or routing destination, as
applicable.
---------------------------------------------------------------------------

    If an Error Position is taken into the CHXBD Error Account,
proposed subparagraph (D) details how such Error Positions would be
liquidated, which states as follows:
    (D) If the Exchange or CHXBD is unable to address Error Positions
in accordance with subparagraph (C) above or if the Exchange or CHXBD
determines to cancel all orders affected by the technical or systems
issue in accordance with Article 20, Rule 12, then such Error Positions
shall be taken into the CHXBD Error Account and CHXBD shall cause to
have such positions liquidated as soon as practicable. In liquidating
such Error Positions, the Exchange or CHXBD shall:
    (i) Provide complete time and price discretion for the trading to
liquidate the Error Positions to a non-affiliated third-party broker-
dealer and shall not attempt to exercise any influence or control over
the timing or methods of such trading; provided, however, that CHXBD
may provide a general instruction to the non-affiliated third-party
broker-dealer that the Error Positions should be liquidated in a timely
manner using commercially reasonable efforts in accordance with custom
and practice within the securities industry while minimizing market
fluctuation to the extent possible; and
    (ii) Establish and enforce policies and procedures that are
reasonably designed to restrict the flow of confidential and
proprietary information between the non-affiliated third-party broker-
dealer and CHXBD/the Exchange associated with the liquidation of the
Error Positions.
    Although proposed subparagraph (D)(i) provides full price/time
discretion to a third-party broker-dealer, the Exchange submits that it
should be permitted to provide a general instruction to the third-party
broker-dealer to effectuate the liquidation of the position in a timely
manner with minimum market fluctuation, in order to improve the
likelihood that the liquidation be effected in market conditions
similar to when the Error Position was obtained, so as to minimize the
potential for loss to the Exchange.
    Proposed subparagraph (E) states as follows:
    (E) The Exchange and CHXBD shall make and keep records to document
all determinations to treat positions as Error Positions and all
determinations for the liquidation of Error Positions through the non-
affiliated third-party broker-dealer, as well as records associated
with the liquidation of Error Positions through the non-affiliated
third-party broker-dealer.
    Incidentally, proposed Article 20, Rule 12 (Order Cancellation by
the Exchange) provides the Exchange and CHXBD with the authority to
cancel orders, including cancelling and/or releasing orders subject to
the proposed CHX Routing Services, which states as follows:
    (a) The Exchange or CHXBD may cancel orders as it deems to be
necessary to maintain fair and orderly markets if a technical or
systems issue occurs at the Exchange, CHXBD, a non-affiliated third
party broker in connection with the CHX Routing Services provided under
Article 19, or another Trading Center to which an order has been
routed. The Exchange or CHXBD shall provide notice of the cancellation
to affected Participants as soon as practicable.
    (b) The Exchange may release orders being held on the Exchange
awaiting another Trading Center execution as it deems necessary to
maintain fair and orderly markets if a technical or systems issue
occurs at the Exchange, CHXBD, a non-affiliated third-party broker, or
another Trading Center to which an order has been routed.
    The proposed rule gives the Exchange authority to cancel orders as
necessary to maintain fair and orderly markets in all situations, not
only in connection with the proposed CHX Routing Services.\39\ In the
context of the proposed CHX Routing Services, proposed paragraph (a)
permits the Exchange to cancel the unrouted portion of a Routable Order
posted to the CHX book, whereas proposed paragraph (b) provides the
Exchange with the authority to release the pending routed portion of a
Routable Order that is pending on the Exchange's systems (i.e., the
portion represented by the corresponding order that has been routed
away). If the Exchange releases a routed order, the Participant order
sender would be given an ``out'' and any resulting executions would be
treated as Error Positions.
---------------------------------------------------------------------------

    \39\ Such a situation may not cause the Exchange to declare
self-help against the routing destination pursuant to Rule 611 of
Regulation NMS. If the Exchange or CHXBD determines to cancel orders
routed to a routing destination under proposed Article 20, Rule
12(a), but does not declare self-help against that routing
destination, the Exchange would continue to be subject to the trade-
through requirements in Rule 611 with respect to that routing
destination.
---------------------------------------------------------------------------

    Incidentally, the Exchange also proposes to amend current Article
20, Rule 8(f) to clarify how cancel messages are currently handled for
orders resting on the CHX book and how they would be handled in
connection with routed orders. The amended Article 20, Rule 8(f)
provides as follows:
    (f) Cancellation of orders. Order cancellation messages submitted
by Participants shall be handled as follows:
    (1) Orders resting on the CHX book shall be immediately and
automatically cancelled upon receipt of a cancellation message;
provided, however, that cross orders (other than opening cross orders)
cannot be cancelled or changed because they are always handled IOC;
\40\ and
---------------------------------------------------------------------------

    \40\ The Exchange proposes replace current language describing
the Immediate Or Cancel order modifier with a reference to the
modifier itself. See CHX Article 1, Rule 2(d)(4).
---------------------------------------------------------------------------

    (2) Cancel messages for routed orders shall be held by the Exchange
while the routed order is away and only the unexecuted routed portion
of a routed order shall be cancelled upon its return to the Matching
System; provided, however, that the Exchange may release the pending
routed portion of a Routable Order pursuant to Article 20, Rule 12.
    Notably, the Exchange proposes to replace current language
describing the Immediate Or Cancel order modifier with a reference to
the modifier itself.\41\ Also, given that cancel messages from

Participant order senders for routed orders will not be forwarded on to
the routing destination because all routed orders shall be marked
IOC,\42\ routed orders shall only be cancelled at the request of
Participants to the extent that an unexecuted remainder is returned to
the Matching System.
---------------------------------------------------------------------------

    \41\ See CHX Article 1, Rule 2(d)(4).
    \42\ Pursuant to proposed Article 19, Rule 3(b), all routed
orders shall be marked IOC. Thus, routed orders shall not be
permitted to rest at away routing destinations.
---------------------------------------------------------------------------

    The following Examples 1 and 2 illustrate when and how the Exchange
would seek to cancel orders in the context of the proposed CHX Routing
Services: \43\
---------------------------------------------------------------------------

    \43\ The examples are not an exhaustive list of scenarios.
---------------------------------------------------------------------------

    Example 1. If CHXBD, a third-party routing broker, or a routing
destination experiences a technical or systems issue that results in
CHXBD not receiving responses to IOC orders that it routed away, the
Exchange may release the routed portion of the Routable Order pending
on the Exchange's systems, pursuant to proposed Article 20, Rule 12(b).
    Example 2. If the Exchange experiences a systems issue, the
Exchange may take steps to cancel all outstanding orders resting on the
CHX book affected by that issue, including the unrouted portion of
Routable Orders posted to the CHX book, and notify affected
Participants of the cancellations. In addition, the Exchange may also
seek to release any pending routed portions awaiting away
confirmations.
    The following Examples 3-6 illustrate how certain Error Positions
may result and be resolved:
    Example 3. An Error Position may result from an order processing
issue at a routing destination. For instance, if a routing destination
experienced a systems problem that affects its order processing, it may
transmit back a message purporting to cancel a routed order, but then
subsequently submit an execution of that same order to The Depository
Trust & Clearing Company (``DTCC'') for clearance and settlement.
    In such a situation, the Exchange would not then allocate the
execution to the Participant because of the earlier cancellation
message from the routing destination. Instead, CHXBD would first cause
to have such executions cancelled pursuant to the rules of the
executing venue or allocate the position to a third-party routing
broker, if practicable. If the executions could not be cancelled or
allocated, CHXBD would post those positions into its CHXBD Error
Account and have the positions liquidated pursuant to proposed Article
19, Rule 2(a)(7)(D).
    Example 4. Error Positions may result if the Exchange receives an
execution report from a routing destination but does not receive
clearing instructions for the execution from the routing destination.
For instance, assume that a Participant submits a Routable Order to buy
100 shares of ABC stock, which causes CHXBD to send an order to a
third-party routing broker, which in turn sends the order to a routing
destination that is subsequently executed, cleared, and closed out by
that routing destination, and the execution is ultimately communicated
back to that Participant. On the next trading day (T+1), if the routing
destination does not provide clearing instructions for that execution,
the Exchange would still be responsible for settling that Participant's
purchase, but would be left with a short position in the CHXBD Error
Account.\44\
---------------------------------------------------------------------------

    \44\ To the extent that CHXBD incurred a loss in covering its
positions, short or long, it would submit reimbursement claims to
either the routing destination and/or third-party routing broker
related to the routed order execution.
---------------------------------------------------------------------------

    In such a situation, the Exchange would take the opposite side of
the Participant's purchase, but submit a claim for reimbursement from
the third-party routing broker or routing destination or cause to have
the routing destination submit valid clearing instructions to cover the
Exchange's short position, if practicable.
    Example 5. Error Positions may result from a technical or systems
issue that causes orders to be executed in the name of the Exchange or
a third-party routing broker \45\ that are not related to any
corresponding Routable Orders initially submitted to the Matching
System. As a result, the Exchange would not be able to assign any
positions resulting from such an issue to Participants.
---------------------------------------------------------------------------

    \45\ Given that CHXBD is an introducing broker-dealer, routed
orders will never be executed in the name of CHXBD.
---------------------------------------------------------------------------

    If the technical or systems issue occurred away from the Exchange
and CHXBD, pursuant to proposed Article 19, Rule 2(a)(7)(C), CHXBD
would first cause to have such executions cancelled pursuant to the
rules of the executing market or have the responsible third-party
routing broker accept the position, if practicable. If the executions
could not be cancelled or accepted by the responsible third-party
routing broker or if the technical or systems issue occurred at the
Exchange or CHXBD, CHXBD would post those positions into its CHXBD
Error Account and have the positions liquidated pursuant to proposed
Article 19, Rule 2(a)(7)(D).
    Example 6. Error Positions may result from a technical or systems
issue at the Exchange through which the Exchange does not receive
sufficient notice that a Participant that has executed trades on the
Exchange has lost the ability to clear trades through DTCC, as well as
where the Exchange received notice of such Participant's loss of
ability to clear trades through DTCC, but, because of a technical or
systems issue at the Exchange, the Exchange was unable to react to such
notice in a timely manner.
    In such a situation, the Exchange would not have valid clearing
information from its Participant, which would prevent the trade from
being automatically processed for clearance and settlement on a locked-
in basis. Thus, pursuant to proposed Article 19, Rule 2(a)(7)(B), the
Exchange would assume that Participant's side of the trades so that the
counterparties can settle the trade. CHXBD would post those positions
into the CHXBD Error Account and have the positions liquidated pursuant
to proposed Article 19, Rule 2(a)(7)(D).
Proposed Article 19, Rule 3 (Routing Events)
    Proposed Rule 3 (Routing Events) outlines when and how a Routable
Order would be routed away from the Matching System and states as
follows:
    (a) Routing Events. A Routable Order, or a portion thereof, shall
be routed pursuant to the CHX Routing Services in compliance with CHX
rules and all federal securities laws, rules and regulations, including
Regulation NMS and Regulation SHO, to the extent necessary: \46\
---------------------------------------------------------------------------

    \46\ A routed order may nevertheless execute against hidden
liquidity priced better than the Protected Quotation.
---------------------------------------------------------------------------

    (1) To permit the display and/or execution of an incoming Routable
Order on the Exchange in compliance with Rules 610(d) and 611 of
Regulations NMS;
    (2) To prevent the execution of an incoming Routable Order for an
Odd Lot if it would trade-through a Protected Quotation of an external
market; or
    (3) To execute an incoming Routable Order marked Do Not Display or
a Routable Order of an Odd Lot that could not be displayed (``incoming
undisplayed Routable Order'') against any Protected Quotation(s) of
external market(s) priced at or through the limit price of the Routable
Order if there are no contra-side resting orders on the CHX book
against which the incoming undisplayed Routable Order could execute.

    (b) Marking routed orders. Every order routed away pursuant to a
Routing Event shall be marked IOC.
    (c) Handling unexecuted remainders. If an unexecuted remainder of a
routed order is returned to the Matching System in one or more parts,
each shall be handled pursuant to Article 20, Rule 8(b)(7).
    (d) Cancelling routed orders. Cancellation requests of routed
orders from Participants shall be handled pursuant to Article 20, Rule
8(f). The Exchange may release pending routed portions of Routable
Orders pursuant to Article 20, Rule 12(b).
    Proposed paragraph (a)(1) permits the routing of a Routable Order
to the extent necessary for an order to be displayed and/or executed on
the Exchange in compliance with Rules 610(d) and Rule 611 of
Regulations NMS (``Routing Event 1'').
    With respect to Rule 610(d) of Regulation NMS, if the display of an
incoming Routable Order would impermissibly lock or cross the market in
violation of Rule 610(d) of Regulation NMS, the portion of the Routable
Order necessary to satisfy all contra-side Protected Quotations of
external markets priced at or better than the Routable Order shall be
routed away to execute against such Protected Quotations. Thus, if the
Routable Order is smaller than, or the same size as, the aggregate size
of all contra-side Protected Quotations of external markets priced at
or better than the Routable Order, the entire Routable Order would be
routed away. However, if the Routable Order is larger than the
aggregate size of all contra-side Protected Quotations of external
markets priced at or better than the Routable Order, only the portion
of the Routable Order necessary to satisfy such Protected Quotations
shall be routed away. The following Examples 7 and 8 illustrate how an
order would be routed to permit a Routable Order to be displayed on the
Exchange in compliance with Rule 610(d) of Regulation NMS:
    Example 7. Assume that the NBBO for security XYZ is $10.00 x $10.01
where Exchange A and Exchange B are each displaying for 100 shares at
the NBO and Exchange C is displaying a Protected Offer for 100 shares
at $10.02. Assume there are no other Protected Offers of external
markets in security XYZ. Assume also that the displayed CHX BBO is
$10.00 x $10.03 and there are no offers priced better than $10.03
resting on the CHX book. Assume then that an incoming fully-displayable
Routable Bid for 100 shares of security XYZ priced at $10.02/share is
received by the Matching System (``Routable Bid 1''). As such, there
are 300 shares worth of Protected Offers of external markets priced at
or better than Routable Bid 1.
    In this situation, the display of Routable Bid 1 at $10.02 would
cross the Protected Offers of Exchange A and B at $10.01 and lock the
Protected Offer of Exchange C at $10.02, in violation of Rule 610(d) of
Regulations NMS.
    Thus, Routing Event 1 would be triggered and the
Exchange's routing systems would create a corresponding buy order
marked IOC for 100 shares of security XYZ,\47\ and route the
corresponding buy order to CHXBD, with instructions for the third-party
routing broker to route the order utilizing its smart-routing
technology pursuant to the Exchange's routing table.\48\ The entire
balance of Routable Bid 1 would then be placed in a pending routed
state. CHXBD would then forward the corresponding buy order with
instructions to the third-party routing broker and the third-party
routing broker would then route the corresponding buy order to Exchange
A and/or Exchange B.\49\
---------------------------------------------------------------------------

    \47\ See supra note 42.
    \48\ Where the routed order is smaller than the aggregate size
of two or more contra-side Protected Quotations that could be
satisfied, the Exchange will rely on the third-party routing broker
to utilize its smart-routing technology to route the order pursuant
to a routing table provided by the Exchange. Thus, the relevant
snapshot of the NBBO for Regulation NMS purposes will be taken by
the third-party routing broker and the third-party routing broker
would route orders IOC and ISO. However, where the routed order is
smaller than the size of one Protected Quotation that could be
satisfied or is the same size as the aggregate size of one or more
contra-side Protected Quotations that could be satisfied, the
Exchange will direct the third-party routing broker to route orders
to specific routing destinations. Thus, the relevant snapshot of the
NBBO will be taken by the Exchange and the Exchange would mark the
directed orders IOC and ISO.
    \49\ Given the frequency at which the bids and offers change in
the national market system, it is possible that a Protected
Quotation identified by the Exchange as having to be satisfied
pursuant to Regulation NMS may no longer be displayed when the
third-party routing-broker receives the corresponding routing order.
Nevertheless, the third-party routing broker will route the order as
received from CHXBD utilizing its smart-routing technology and
pursuant to the Exchange's routing table.
---------------------------------------------------------------------------

    Any unexecuted remainders returned to the Matching System would be
handled pursuant to proposed Article 20, Rule 8(b)(7), as discussed
below.
    Example 8. Assume the same as Example 7, except that Routable Bid 1
is for 500 shares of security XYZ.
    In this situation, similar to Example 7, the display of Routable
Bid 1 at $10.02 would cross the Protected Offers of Exchange A and B at
$10.01 and lock the Protected Offer of Exchange C at $10.02, all in
violation of Rule 610(d) of Regulations NMS.
    As such, Routing Event 1 would be triggered and since
Routable Bid 1 for 500 shares is larger than the aggregate size of all
Protected Offers of external markets priced at or better than Routable
Bid 1 (i.e., 300 shares total), the Exchange's routing systems would
create three corresponding buy orders marked IOC and ISO with
instructions to route one buy order for 100 shares priced at $10.01/
share to Exchange A, one buy order for 100 shares priced at $10.01/
share to Exchange B and one buy order for 100 shares priced at $10.02/
share to Exchange C.\50\ The routed portion would then enter a pending
routed state on the Exchange's system and the remaining 200 shares
would immediately be displayed on the CHX book at $10.02. This ``ship
and post'' would permit the unrouted portion to be displayed in
compliance with Rule 610(d) of Regulations NMS.
---------------------------------------------------------------------------

    \50\ See supra note 48.
---------------------------------------------------------------------------

    Any unexecuted remainders returned to the Matching System would be
handled pursuant to proposed Article 20, Rule 8(b)(7), as discussed
below.
    With respect to Rule 611 of Regulation NMS, if the execution of an
incoming Routable Order against a resting order on the CHX book would
result in an impermissible trade-through of a Protected Quotation of an
external market in violation of Rule 611 of Regulation NMS, the portion
of the Routable Order necessary to prevent an improper trade-through
shall be routed away to execute against such Protected Quotations of
external markets. Thus, if the Routable Order is smaller than, or the
same size as, the aggregate size of all contra-side Protected
Quotations of external markets priced better than the Routable Order,
the entire Routable Order would be routed away. However, if the
Routable Order is larger than the aggregate size of all contra-side
Protected Quotations of external markets priced better than the
Routable Order, only the portion of the Routable Order necessary to
satisfy such Protected Quotations shall be routed away. The following
Examples 9 and 10 illustrate how an order would be routed to permit a
Routable Order to execute within the Matching System in compliance with
Rule 611 of Regulation NMS:
    Example 9. Assume that the NBBO for security XYZ is $10.00 x $10.01
where Exchange A and Exchange B are each displaying 100 shares at
$10.01 and Exchange C is displaying a Protected Offer for 100 shares at
$10.02. Assume there are no other Protected Offers of

external markets in security XYZ. Assume then that the CHX BBO is
$10.00 x $10.03, with 100 shares displaying at the $10.03 and there are
no offers priced better than $10.03 resting on the CHX book. Assume
then that an incoming fully-displayable Routable Bid for 100 shares of
security XYZ priced at $10.03/share is received by the Matching System
(``Routable Bid 1''). As such, there are 300 shares worth of Protected
Offers of external markets priced better than Routable Bid 1. In this
situation, the execution of Routable Bid 1 at $10.03 against the CHX
Best Offer would result in an impermissible trade-through of the
Protected Offers of Exchanges A, B and C, in violation of Rule 611 of
Regulations NMS.
    Thus, Routing Event 1 would be triggered and the
Exchange's routing systems would create a corresponding buy order
marked IOC for 100 shares of security XYZ,\51\ and route the
corresponding buy order to CHXBD, with instructions for the third-party
routing broker to route the order utilizing its smart-routing
technology pursuant to the Exchange's routing table.\52\ The entire
balance of Routable Bid 1 would then be placed in a pending routed
state. CHXBD would then forward the corresponding buy order with
instructions to the third-party routing broker and the third-party
routing broker would then route the corresponding buy order to Exchange
A and/or Exchange B.\53\
---------------------------------------------------------------------------

    \51\ See supra note 42.
    \52\ See supra note 48.
    \53\ See supra note 49.
---------------------------------------------------------------------------

    Any unexecuted remainders returned to the Matching System would be
handled pursuant to proposed Article 20, Rule 8(b)(7), as discussed
below.
    Example 10. Assume the same as Example 9, except that Routable Bid
1 is for 500 shares of security XYZ.
    In this situation, the execution of Routable Bid 1 at $10.03
against the CHX Best Offer would result in an impermissible trade-
through of the Protected Offers of Exchanges A, B and C, in violation
of Rule 611 of Regulations NMS.
    As such, Routing Event 1 would be triggered and since
Routable Bid 1 for 500 shares is larger than the aggregate size of all
Protected Offers of external markets priced at or better than Routable
Bid 1 (i.e., 300 shares total), the Exchange's routing systems would
create three corresponding buy orders marked IOC and ISO with
instructions to route one buy order for 100 shares priced at $10.01/
share to Exchange A, one buy order for 100 shares priced at $10.01/
share to Exchange B and one buy order for 100 shares priced at $10.02/
share to Exchange C.\54\ The routed portion would then enter a pending
routed state on the Exchange's system and 100 shares of the unrouted
portion of Routable Bid 1 would execute against the CHX Best Offer at
$10.03/share. Since there is no other resting liquidity against which
the remaining 100 shares of the unrouted portion of Routable Bid 1
could execute, the Exchange would post and display the unexecuted
remainder of the unrouted portion at $10.03. This ``ship and execute''
would permit the unrouted portion to be executed within the Matching
System in compliance with Rule 611 of Regulations NMS.
---------------------------------------------------------------------------

    \54\ See supra note 48.
---------------------------------------------------------------------------

    Any unexecuted remainders returned to the Matching System would be
handled pursuant to proposed Article 20, Rule 8(b)(7), as discussed
below.
    Proposed paragraph (a)(2) provides that an incoming Routable Order
for an Odd Lot will be routed away if its execution on the Exchange
would trade-through a Protected Quotation of an external market
(``Routing Event 2''). This language is consistent with a
proposed amendment to current Article 20, Rule 5(b) that will prohibit
the execution of incoming Odd Lot limit orders if the execution would
trade-through a Protected Quotation of an external market, as discussed
below, but would permit resting Odd Lot orders to be executed through
the NBBO.\55\ The following Example 11 illustrates how Routing Event
2 would be triggered.
---------------------------------------------------------------------------

    \55\ Current CHX Article 20, Rule 5(b) permits inbound Odd Lot
orders to execute through Protected Quotations of external markets.
Also, incoming Odd Lot limit orders are permitted to post to, or
remain on, the CHX book through the NBBO, provided that it could not
be displayed pursuant to CHX Article 20, Rule 8(b)(6). Odd Lot
orders that are displayed pursuant to current CHX Article 20, Rule
8(b)(6) are treated like Round Lot orders for the purposes of Rule
610(d) of Regulation NMS.
---------------------------------------------------------------------------

    Example 11. Assume that the NBBO for security XYZ is $10.00 x
$10.01 and Exchange A is the only Protected Offer at the NBO and is
displaying 100 shares. Assume also that CHX has a Protected Offer for
100 shares priced at $10.02/share and there are no other orders resting
on the CHX book with respect security XYZ. Assume then that an incoming
fully-displayable Routable Bid for 50 shares of security XYZ priced at
$10.02/share is received by the Matching System (``Routable Bid 1'').
    In this situation, Routing Event 2 would be triggered and
the Exchange's routing systems would create a corresponding buy order
marked IOC for 50 shares of security XYZ priced at $10.01/share and
route the order away with instructions to direct the order to Exchange
A.\56\ The entire balance of Routable Bid 1 would then be placed in a
pending routed state. CHXBD would then forward the corresponding buy
order with instructions to the third-party routing broker and the
third-party routing broker would then route the corresponding buy order
to Exchange A.
---------------------------------------------------------------------------

    \56\ Current Article 20, Rule 5(b) would permit Routable Bid 1
to execute against the resting offer at $10.02 for 50 shares of XYZ,
as the execution would be for an Odd Lot.
---------------------------------------------------------------------------

    Any unexecuted remainders returned to the Matching System would be
handled pursuant to proposed Article 20, Rule 8(b)(7), as discussed
below.
    Proposed paragraph (a)(3) provides that an incoming Routable Order
that is either marked Do Not Display or is an undisplayed yet
displayable Odd Lot will be routed away to execute against any
Protected Quotation(s) of external market(s) priced at or better than
the limit price of the incoming undisplayed Routable Order if there is
no resting liquidity on the CHX book against which the incoming
undisplayed Routable Order could execute (``Routing Event
3).\57\ Thus, the difference between Routing Event 1
and Routing Event 3 is that Routing Event 3 would not
result in a trade-through of a Protected Quotation of an external
market because there are no resting contra-side orders on the CHX book
nor a locked or crossed market in violation of Rule 610(d) of
Regulation NMS because the incoming Routable Order could not be
displayed.\58\ The following Examples 12-13 illustrate how Routing
Event 3 could be triggered:
---------------------------------------------------------------------------

    \57\ An incoming Routable Order marked Reserve Size, as defined
under Article 1, Rule 2(c)(3), will always be treated as fully-
displayed order for the purposes of the proposed CHX Routing
Services.
    \58\ Currently, the Exchange permits undisplayed yet displayable
orders (e.g., Odd Lot limit orders that could not be aggregated with
other Odd Lots or Mixed Lots, pursuant to CHX Article 20, Rule
8(d)(6)) and fully-undisplayed orders) (e.g., limit orders marked Do
Not Display) to rest through the NBBO. However, if a subsequent
incoming contra-side order would result in a resting order priced
through the NBBO being executed, the resting order ``shall be
cancelled to the extent necessary to allow the inbound order to be
executed or quoted.'' See CHX Article 20, Rule 5(a). As discussed in
detail below, the Exchange now proposes to expand the applicability
of the CHX Only modifier, which offers the CHX Only Price Sliding
Processes, to all limit orders, regardless of the attached order
display modifier and to require all Do Not Display orders that are
resting on the CHX book to be handled as CHX Only, even if they were
not originally marked CHX Only by the order sender.
---------------------------------------------------------------------------

    Example 12. Assume that the NBBO for security XYZ is $10.00 x
$10.02 and only Exchange A has a Protected Offer at $10.02, which is
for 100 shares. Assume also that the CHX book is empty with respect
security XYZ. Assume then that an incoming Routable Bid marked Do Not
Display for 200

shares of security XYZ, priced at $10.03 is received by the Matching
System (``Routable Bid 1'').
    In this situation, since the posting of Routable Bid 1 at $10.03
would result in a bid resting on the CHX book through the NBO, Routing
Event 3 would be triggered and the Exchange's routing systems
would create a corresponding buy order marked IOC for 100 shares priced
at $10.02/share and route the corresponding buy order to Exchange A.
The routed portion would then enter a pending routed state on the
Exchange's systems. Immediately after routing the corresponding buy
order away, the unrouted 100 shares would be posted to the CHX book
undisplayed at $10.03.
    Any unexecuted remainders returned to the Matching System would be
handled pursuant to proposed Article 20, Rule 8(b)(7), as discussed
below.
    Example 13. Assume the same as Example 12 and that after the
unrouted 100 shares of Routable Bid 1 posted to the CHX book at $10.03,
Exchange B displayed a Protected Offer for 100 shares of security XYZ
at $10.02.
    In this situation, since the Exchange will not route away resting
orders, Routable Bid 1 would be price slid to the NBO locking price of
$10.02, as all resting orders marked Do Not Display will be handled as
CHX Only and subject to price sliding.\59\
---------------------------------------------------------------------------

    \59\ Id.
---------------------------------------------------------------------------

    Incidentally, given that the Exchange proposes to permit certain
limit orders marked Do Not Display to be routable, the Exchange
proposes to amend the definition of ``Do Not Route,'' under Article 1,
Rule 2(b)(3)(A), by replacing the current term ``displayed'' with the
more inclusive term ``ranked.'' As such, amended Article 1, Rule
2(b)(3)(A) will provide that ``Do Not Route'' means ``a limit or market
order modifier that requires an order to only be executed or ranked
within the Exchange's Matching System and not be routed to another
market.''
    With respect to how unexecuted remainders of routed orders would be
treated by the Matching System, amended Article 20, Rule 8(b)(7) states
as follows:
    (7) Priority of unexecuted remainders of routed orders returned to
the Matching System. An unexecuted remainder of a routed order returned
to the Matching System in one or more parts shall be added to the
existing balance of the related Routable Order already posted to the
CHX book. If no balance exists at the time a part of an unexecuted
remainder of a routed order is returned to the Matching System, it
shall be treated as a new incoming order.\60\
---------------------------------------------------------------------------

    \60\ Current Article 20, Rule 8(b)(7) provides language that the
Exchange proposes to delete concerning order execution priority for
price slid orders because the concept of the ``Working Price''
enunciated in the rule is actually applicable to execution priority
for all orders, as discussed in detail below.
---------------------------------------------------------------------------

    As discussed above, when a Routing Event is triggered, a
corresponding routing order is created by the Exchange's routing system
that represents the relevant portion of the Routable Order that is to
be routed away.\61\ Upon routing of the corresponding routed order, the
routed portion of the Routable Order enters a pending state on the
Matching System (``pending routed portion''). If the Exchange receives
an execution confirmation concerning the corresponding routed order,
the related pending routed portion will be released as executed to the
extent represented by the execution confirmation. If, however, the
Exchange receives a cancellation confirmation from the away Trading
Center, the pending routed portion will be released as unexecuted to
the extent represented by the cancellation confirmation.\62\ In turn,
the pending routed portion released as unexecuted will either (1) be
added to any existing balance of the Routable Order already posted to
the CHX book or (2) be treated as a new incoming order to the Matching
System.\63\
---------------------------------------------------------------------------

    \61\ See supra Examples 7-13.
    \62\ The Exchange can also release pending routed portions
pursuant to proposed Article 20, Rule 12, in connection with a
systems or technical issue. In such a case, the pending routed
portion would be released as unexecuted and cancelled back to the
order sender.
    \63\ It is important to note that a cancel message from the away
routing destination is not a new incoming order. Once the cancel
message is received by the Matching System, the released pending
routed portion may be handled as an incoming order if there is no
existing balance of the Routable Order already posted to the CHX
book.
---------------------------------------------------------------------------

    An existing balance can occur if an unrouted portion had posted to
the CHX book immediately after the routed portion had been routed away
(i.e., ``ship and post'') and the unrouted portion was resting on the
CHX book when the pending routed portion was released as unexecuted. An
existing balance could also occur even if there was no portion of the
Routable Order initially posted to the CHX book where the routed
portion returned to the Matching System in two or more parts. In such a
situation, the first unexecuted remainder to return to the Exchange
would be treated as an incoming order and any subsequent unexecuted
remainders would be added to any existing balance of previously
returned remainders. The portion of a Routable Order released as
unexecuted that is treated as an incoming order may result in that
released portion being routed away again, if a proposed Routing Event
is triggered, executed against the CHX book, or posted to the CHX book
as a new order. The following Examples 14-16 illustrate how unexecuted
remainders of routed orders would be handled by the Matching System:
    Example 14. Assume that a Routable Order to buy 500 shares of
security XYZ at $10.00/share is received by the Matching System that
will be subject to a ``ship and post'' because Exchange A and Exchange
B are displaying Protected Offers at the NBO priced at $10.00/share
(``Protected Offer A'' and ``Protected Offer B''). Assume that pursuant
to Routing Event 1, the Exchange's routing systems created two
corresponding buy orders for 200 shares each to be routed to Exchange A
and Exchange B (``Routed Bid A'' and ``Routed Bid B,'' respectively).
The routed portion then enters a pending routed state on the Exchange's
systems. Immediately after Routed Bid A and Routed Bid B are routed
way, the remaining 100 shares of the unrouted portion of the Routable
Order are posted to the CHX book. Assume that while the unrouted
portion remains posted to the CHX book, the Matching System receives an
execution confirmation for Routed Bid A for 200 shares, an execution
confirmation for Routed Bid B for 100 shares, and a cancellation
message for Routed Bid B for 100 shares.
    In this situation, of the 400 shares representing the pending
routed portion, 200 of those shares would be released as executed and
reported to clearing. Upon receipt of the second execution, 100 of
those shares would be released as executed and reported to clearing.
Upon receipt of the cancellation message, the remaining 100 shares
would be released as unexecuted and would be posted to the existing
balance of the Routable Order already posted to the CHX book, which
would result in 200 shares of the Routable Order being posted to the
CHX book priced at $10.00/share.
    Example 15. Assume the same as Example 14, except that by the time
the first execution confirmation returned to the Matching System, the
unrouted portion of the Routable Order resting on the CHX book was
fully executed.
    In this situation, upon receipt of the first execution
confirmation, 200 of those shares would be released as executed and
reported to clearing. Upon receipt of the second execution, 100 of
those shares would be released as executed and reported to clearing.
Upon

receipt of the cancellation message, the remaining 100 shares would be
released as unexecuted and would be treated as a new incoming bid to
purchase 100 shares of security XYZ at $10.00/share.
    If a Protected Offer of an external market priced at $10.00/share
were displayed prior the final 100 shares of the Routable Order being
released as unexecuted, Routing Event 1 would be triggered
again and the Exchange's routing systems would create a corresponding
buy order for 100 shares of XYZ priced at $10.00/share and the Routable
Order would be routed to the venue displaying the new Protected Offer.
If, instead, the Exchange received an offer for security XYZ priced at
$10.00/share or better on the Matching System prior to the final 100
shares of the Routable Order being released as unexecuted, the 100
released shares would execute against the resting offer on the CHX
book. However, if the CHX book were empty and the NBBO did not prohibit
the posting of a bid at $10.00/share, the 100 released share would be
posted to the CHX book and ranked on the CHX book pursuant to Article
20, Rule 8(b).\64\
---------------------------------------------------------------------------

    \64\ As discussed in detail below, the Exchange proposes to
amend current CHX Article 20, Rule 8 in order to clarify how the
Exchange currently ranks orders on the CHX book.
---------------------------------------------------------------------------

    Example 16. Assume the same as Example 14, except that the Matching
System receives an execution confirmation for Routed Bid A for 100
shares, a cancellation confirmation for Routed Bid A for 100 shares,
and a cancellation message for Routed Bid B for 200 shares. Assume also
that the portion of the Routed Order released as unexecuted pursuant to
the first cancellation message resulted in 100 shares of the Routed
Order being posted to the CHX book.
    In this situation, the 200 shares of the pending routed portion
would be released as unexecuted pursuant to Routed Bid B being returned
cancelled and would be added to the existing balance of 100 shares
already posted to the CHX book due to the earlier cancellation message
received regarding Routed Bid A.
Exception From Article 3, Rule 20 (No Affiliation Between Exchange and
any Participant)
    Current Article 3, Rule 20 provides, in pertinent part, that the
Exchange or any entity with which it is affiliated shall not, directly
or indirectly, acquire or maintain an ownership interest in a
Participant in the absence of an effective filing under Section 19(b)
of the Act. The rule further provides that a Participant shall not be
or become an affiliate of the Exchange or any affiliate of the Exchange
in the absence of an effective filing under Section 19(b) of the Act.
The purpose of Article 3, Rule 20 is to prevent or manage potential
conflicts of interest that could arise from the Exchange or its
affiliates having an ownership interest in a Participant, particularly
with respect to the Exchange's obligation under Section 19(g) of the
Act to enforce its Participants' compliance with the Act, the
Commission's rules thereunder, and Exchange Rules.
    The Exchange is currently in compliance with Article 3, Rule 20.
CHX Holdings Inc. wholly owns the Exchange and CHXBD. As such, the
Exchange is affiliated with CHXBD, which is a registered broker-dealer
and member of FINRA. However, CHXBD is not yet a Participant of the
Exchange.
    The Exchange believes that CHXBD should now be permitted to operate
as an affiliated Participant outbound router on behalf of the Exchange
and, to this end, the Exchange submits this immediately effective
filing pursuant to Section 19(b)(3)(A) of the Act, which is consistent
with the requirements of Article 3, Rule 20. Specifically, the Exchange
believes that proposed Article 19, Rule 2(a) would eliminate any
potential conflict of interest that could arise in the context of an
affiliation between the Exchange and CHXBD, as a Participant, by
requiring the following:
     The Exchange will regulate CHXBD as a facility of the
Exchange;
     FINRA, a self-regulatory organization unaffiliated with
the Exchange or any of its affiliates, is CHXBD's designated examining
authority;
     CHXBD will not engage in any other business other than (a)
its outbound router function and (b) any other activities it may engage
in as approved by the Commission;
     The use of CHXBD for outbound routing by Participants is
optional;
     The Exchange shall establish and maintain procedures and
internal controls reasonably designed to adequately restrict the flow
of confidential and proprietary information between the Exchange and
its facilities (including CHXBD as its routing facility) and any other
entity; and
     The books, records, premises, officers, agents, directors
and employees of CHXBD as a facility of the Exchange shall be deemed to
be the books, records, premises, officers, agents, directors and
employees of the Exchange for the purposes of, and subject to oversight
pursuant to, the Act.
    As a facility of the Exchange, CHXBD will be subject to the
Exchange's and the Commission's regulatory oversight, and the Exchange
will be responsible for ensuring that CHXBD's outbound routing function
is operated consistent with Section 6 of the Act and the Exchange's
proposed rules. In addition, the Exchange will be required to file with
the Commission proposed rule changes and fees relating to CHXBD's
outbound routing function. Any such rules and fees relating to CHXBD's
outbound routing function will be subject to the Exchange's non-
discrimination requirements. The Exchange also notes that the
Commission has previously approved an affiliation between an exchange
and its member outbound routing facility based on rules similar to the
provisions of proposed Article 19, Rule 2(a) stated above.\65\ Thus,
the Exchange submits that CHXBD becoming an affiliate Participant of
the Exchange to be consistent with the Act.
---------------------------------------------------------------------------

    \65\ See BYX Rule 2.11; see also Securities Exchange Act Release
No. 62716 (August 13, 2010), 75 FR 51295 (August 19, 2010) (In the
Matter of the Application of BATS Y-Exchange Inc. for Registration
as a National Securities Exchange Findings, Opinion, and Order of
the Commission).
---------------------------------------------------------------------------

Amended Article 20, Rule 5 (Prevention of Trade-Throughs)
    In light of the proposed CHX Routing Services, the Exchange
proposes to amend current Article 20, Rule 5 to clarify how the
Matching System will treat orders received by the Matching System that
could not be executed within the Matching System in compliance with
Rule 611 of Regulation NMS and to prohibit incoming Odd Lot orders from
executing through the NBBO. Amended Rule 5(a) states as follows:
    (a) An inbound order for at least a round lot is not eligible for
execution on the Exchange if its execution would be improper under Rule
611 of Regulation NMS (but not including the exception set out in Rule
611(b)(8)) (an ``improper trade-through'') and such an order shall be
handled by the Exchange as follows:
    (1) If the execution of all or part of an inbound Routable Order,
as defined under Article 1, Rule 1(oo), would cause an improper trade-
through, that Routable Order (or the portion of that order that would
cause an improper trade-through) shall be routed away, pursuant to
Article 19, Rule 3(a)(1); or
    (2) If the execution of all or part of an inbound order would cause
an improper trade-through and the order cannot be routed away, the
order shall be automatically cancelled; provided, however, that such an
order marked

CHX Only may be subject to the CHX Only Price Sliding Processes,
detailed under Article 1, Rule 2(b)(1)(C) and not automatically
cancelled.
    Specifically, under amended paragraph (a), the Exchange proposes to
clarify that ``Rule 611'' refers to Rule 611 of ``Regulation NMS.''
Under proposed paragraph (a)(1), the Exchange proposes to add language
clarifying that inbound orders that are ``Routable Orders,'' as defined
under proposed Article 1, Rule 1(oo), would be routed away pursuant to
proposed Article 19, Rule 3(a)(1),\66\ as opposed to current
Interpretation and Policy .03 of Article 20, Rule 5, if an improper
trade-through would result.\67\ Also, under proposed paragraph (a)(2),
the Exchange proposes to clarify that all inbound non-Routable Orders
that would cause an improper trade-through shall be automatically
cancelled; provided, however, that if the order is marked CHX Only and
eligible for price sliding, it shall be price slid and not
automatically cancelled.\68\
---------------------------------------------------------------------------

    \66\ See supra Examples 9 and 10.
    \67\ As discussed above, the Exchange proposes to delete
Interpretation and Policy .03 of Rule 5, as the routing
functionality contemplated under that language is not what the
Exchange now proposes through the proposed CHX Routing Services.
With respect to paragraph (a) thereunder, given that the Cross With
Satisfy modifier is not currently available and only certain Limit
orders could be routed away pursuant to the proposed CHX Routing
Services, the Exchange proposes to delete the current paragraph (a).
When and if the Exchange decides to reactivate the Cross With
Satisfy modifier, the Exchange will propose new language concerning
the routing of Cross With Satisfy orders pursuant to Rule 19b-4
under the Act.
    \68\ See CHX Article 1, Rule 2(b)(1)(C). As discussed below, the
Exchange proposes to amend the CHX Only modifier to apply to all
Limit orders, regardless of display modifier. The CHX Only modifier
is currently only applicable to ``fully-displayable'' Limit orders,
which exclude orders marked Do Not Display or Reserve Size.
---------------------------------------------------------------------------

    The Exchange also proposes to delete language stating that
undisplayed orders resting through the NBBO shall be cancelled to the
extent necessary for an inbound order, against which an execution would
result in an improper trade-through, to be executed or quoted.\69\ This
is because the Exchange now proposes to require all resting orders
marked Do Not Display to be price slid if the execution of such a
resting order would result in an impermissible trade-through of a
Protected Quotation of an external market, as discussed below.
---------------------------------------------------------------------------

    \69\ The Exchange also propose [sic] to delete Article 20, Rule
8(e)(6), which provides similar language.
---------------------------------------------------------------------------

    Amended paragraph (b) states as follows:
    (b) Odd Lot crosses and resting Odd Lot limit orders/remainders
priced through a contra-side Protected Quotation of an external market
shall be eligible for execution on the Exchange even if the execution
would trade-through a Protected Quotation of an external market.
Inbound Odd Lot limit and market orders shall not be permitted to
trade-through a contra-side Protected Quotation of an external market
and shall be treated the same as Round Lots.
    Currently, the Exchange permits incoming and resting Odd Lot orders
to execute through the NBBO. However, the Exchange now proposes to
prohibit incoming Odd Lot orders from trading through a contra-side
Protected Quotation of an external market, while continuing to permit
resting Odd Lot orders to trade-through a contra-side Protected
Quotation of an external market.
    As proposed, if an incoming Odd Lot Routable Bid (Offer) were
matchable against an offer (bid) resting on the CHX book and the
execution of the incoming bid (offer) would result in a trade-through
of the NBO (NBB), proposed Routing Event 2 would be triggered
and the incoming Odd Lot bid (offer) would be routed away. If, however,
the incoming Odd Lot order is not a Routable Order, the incoming Odd
Lot order would be price slid if marked CHX Only or cancelled if not
eligible for price sliding. Thus, the Exchange proposes to treat
incoming Odd Lot orders the same as Round Lots.
Amended Article 1, Rule 2(c)(2) (Do Not Display)
    The Exchange proposes to amend the definition of the Do Not Display
modifier under current Article 1, Rule 2(c)(2) to add that all limit
orders marked Do Not Display resting on the CHX book shall be handled
as CHX Only, even if such orders were not originally marked CHX Only,
which cannot be overridden by an order sender. By definition, this
would include, inter alia, Routable Orders marked Do Not Display that
immediately posted to the CHX book or where an unexecuted remainder of
a Routable Order marked Do Not Display posted to the CHX book (i.e., a
routed order returned to the Matching System as unexecuted). In the
later situation, the Routable Order marked Do Not Display would only be
handled as CHX Only after the order was posted to the CHX book, as
handling such an order CHX Only prior to its posting to the CHX book
would preclude routing.
    The Exchange also proposes to amend current Article 1, Rule 2(c)(2)
to delete language that incorrectly states that an order may be marked
Do Not Display ``in part,'' as a limit order marked Do Not Display can
only be fully-hidden. Incidentally, the Exchange proposes to expand the
applicability of the CHX Only modifier to all limit orders, regardless
of order display modifier, as discussed below.
Amended Article 20, Rule 6(d) (Locked and Crossed Markets)
    In light of the proposed CHX Routing Services, the Exchange
proposes to amend current Article 20, Rule 6(d) to clarify how the
Matching System will treat orders received by the Matching System that
could not be displayed in compliance with Rule 610(d) of Regulation
NMS. As such, amended Rule 6(d) states as follows:
    (d) Matching System operation. Except as permitted in paragraph (c)
above, an order is not eligible for display on the Exchange if its
display would lock or cross a Protected Quotation of an external market
in violation of Rule 610 of Regulation NMS and such an order shall be
handled by the Exchange as follows:
    (1) If the display of a Routable Order, as defined under Article 1,
Rule 1(oo), would impermissibly lock or cross a Protected Quotation of
an external market, that Routable Order, or a portion thereof, shall be
routed away, pursuant to Article 19, Rule 3(a)(1); or
    (2) If the display of an order would impermissibly lock or cross a
Protected Quotation of an external market and the order cannot be
routed away, that order shall be automatically cancelled; provided,
however, that such an order marked CHX Only may be subject to the CHX
Only Price Sliding Processes, detailed under Article 1, Rule 2(b)(1)(C)
and not automatically cancelled.
    Specifically, under paragraph (d), the Exchange proposes to specify
that ``Rule 610'' refers to ``Rule 610 of Regulation NMS.'' Thereunder,
amended paragraph (d)(1) provides that if the display of a Routable
Order would impermissibly lock or cross a Protected Quotation of an
external market, that Routable Order, or a portion thereof, shall be
routed away, pursuant to Article 19, Rule 3(a)(1),\70\ as opposed to
current Interpretation and Policy .03 of Article 20, Rule 5. In
addition, amended paragraph (b)(2) provides that if the display of an
order would impermissibly lock or cross a Protected Quotation of an
external market and the order cannot be routed away, that order shall
be automatically cancelled; provided however that such an order marked
CHX Only may be subject to the CHX Only Price Sliding Processes,
detailed under Article 1, Rule

2(b)(1)(C) and not automatically cancelled.
---------------------------------------------------------------------------

    \70\ See supra Examples 7 and 8.
---------------------------------------------------------------------------

Amended Article 20, Rule 8 (Operation of the Matching System)
    The Exchange proposes to amend Article 20, Rule 8 to adopt
provisions concerning the proposed CHX Routing Services and to clarify
how orders are currently ranked, displayed and executed by the CHX
Matching System.
    The Exchange proposes to amend Rule 8(a) to provide that
Participants may route orders to the Matching System through any
communications line approved by the Exchange and may only route orders
away from the Matching System by utilizing the proposed CHX Routing
Services, pursuant to proposed Article 19.\71\
---------------------------------------------------------------------------

    \71\ As noted above in the discussion concerning proposed CHX
Article 19, Rule 2(a)(3), the use of CHXBD to route orders is
optional because Participants are always free to submit orders to
away markets without utilizing CHX or CHXBD. However, to the extent
that a Participant wishes to route an order directly away from the
Matching System, the Participant must use the proposed CHX Routing
Services, by submitting a Routable Order to the Matching System.
---------------------------------------------------------------------------

    Current Rules 8(b) and (d) describes the ranking, display and
execution of orders within the Matching System. Although the current
language is accurate, the Exchange submits that additional granularity
is appropriate in light of the proposed CHX Routing Services and
proposed amendment to the CHX Only modifier to expand its applicability
to Do Not Display and Reserve Size limit orders, as described below. It
is important to note that the Exchange does not propose to
substantively modify any functionality described under current
paragraphs (b) and (d).
    Amended paragraph (b) begins as follows:
    (b) All orders accepted by the Matching System that will post to
the CHX book shall be ranked at each price point up to its limit price
by display status then sequence number. Resting limit orders shall be
ranked as follows:
    Unlike current paragraph (b), which refers to orders ``sent to''
the Matching System, amended paragraph (b) refers more accurately to
orders ``accepted'' by the Matching System, as orders sent to the
Matching System may be rejected by the Matching System and never
ranked. In addition, unlike current paragraph (b), which simply refers
to ranking orders ``according to their price and time of receipt,''
amended paragraph (b) provides that orders are ranked at each price
point up to its limit price by ``display status'' then ``sequence
number.'' \72\ That is, when an order is to be posted to the CHX book,
at each price point up to its limit price, the order is sorted into one
of three pools based on ``display status'' at each price point, and
within each pool, prioritized based on ``sequence number,'' which
reflects time priority (e.g., a bid that will be posted to CHX book
with limit price of $10.00 is ranked at $10.00, $9.99, $9.98, etc . .
.). This ranking of orders at numerous price points is particularly
necessary given the Exchange's price sliding functionalities, which
requires price slid orders to maintain original time priority, even if
the price slid order is executable at a price less aggressive than its
limit price (i.e., order always execute at its ``Working Price'').\73\
Specifically, the ranking of orders at each price point up to its limit
price permits such orders to preserve its original time priority within
the CHX book, notwithstanding the number of price sliding events. This
ranking scheme also prevents the Matching System from having to re-
establish time priority after each price sliding event, as their
relative rank is established at the time the order is accepted by the
Matching System.
---------------------------------------------------------------------------

    \72\ Time priority in the Matching System is established by a
unique ``sequence number'' (e.g., 1, 2, 3, etc . . .) that the
Matching System assigns to each incoming order at the original time
of order entry. These sequence numbers ensure that orders retain
their relative time priority to each other, even as they are priced
slid, and these sequence numbers will not be changed nor will an
order receive a new sequence number, so long as it is resting in the
CHX book. ``Display status'' refers to one of three categories,
described in paragraphs (b)(1)-(3), under which each order received
by the Matching System is sorted.
    \73\ Proposed Article 1, Rule 1(pp), defines ``Working Price''
as ``the most aggressive price at which a resting Limit order, as
defined under Article 1, Rule 2(a)(1), can execute within the
Matching System, in compliance with Rule 611 under Regulation NMS.
An order's Working Price may be any price up to and including its
limit price.''
---------------------------------------------------------------------------

    Amended paragraph (b)(1) describes display status pool 1
and states as follows:
    (1) Fully-displayable orders and displayed portions of Reserve Size
orders. At each price point up to their limit prices, fully-displayable
limit orders of any size and the displayed portion of Reserve Size
orders, as defined under Article 1, Rule 2(c)(3), shall be ranked based
on their sequence numbers by the Exchange's Matching system and shall
be ranked ahead of undisplayed portions of Reserve Size orders and
orders marked Do Not Display. Orders sent to an Institutional Broker
for handling shall not have any priority within the Matching System
unless and until they are received by the Matching System.
    Amended paragraph (b)(1) is substantively similar to current
paragraph (b)(1), with amendments to explicitly refer to the ranking of
orders at each price point up to its limit price and to replace ``times
of receipt'' with the more accurate ``sequence numbers.'' Also, the
Exchange proposes to eliminate references to Mixed Lot and Odd Lot
orders, as Mixed Lot and Odd Lot orders are always ``fully-
displayable,'' but may not actually be displayed, if such orders are
not at the CHX Best Bid or Offer (``CHX BBO'') and cannot be aggregated
into Round Lots.\74\ Thus, ``fully-displayable'' orders are limit
orders of any size not marked Do Not Display or Reserve Size. Along
with fully-displayable orders, the displayed portions of Reserve Size
orders are currently part of display status pool 1, which is
ranked ahead of other display statuses.
---------------------------------------------------------------------------

    \74\ See CHX Article 20, Rule 8(b)(6).
---------------------------------------------------------------------------

    Amended paragraph (b)(2) describes display status pool 2
and states as follows:
    (2) Undisplayed portion of Reserve Size orders. At each price point
up to their limit prices, the undisplayed portions of Reserve Size
orders shall be ranked based on their sequence numbers by the
Exchange's Matching System, but shall be ranked after any orders as
described in paragraph (b)(1) above.
    Amended paragraph (b)(2) is substantively similar to current
paragraph (b)(2), with amendments to explicitly refer to the ranking of
orders at each price point up to its limit price, to clarify that the
paragraph applies to the ``undisplayed portion of Reserve Size
orders,''\75\ to replace ``times of receipt'' with the more accurate
``sequence numbers,'' and to clarify that undisplayed portions of
Reserve Size orders are ranked behind orders in display status pool
1.
---------------------------------------------------------------------------

    \75\ The only ``orders that are not displayed in part'' are
limit orders marked Reserve Size, where the reserve portion is
undisplayed. See CHX Article 1, Rule 2(c)(3). As discussed above,
the Exchange proposes to amend the definition of ``Do Not Display''
to correct a misstatement that orders may be Do Not Display ``in
part.'' Only orders marked Reserve Size may be hidden in part.
---------------------------------------------------------------------------

    Amended paragraph (b)(3) describes the display status pool
3 and states as follows:
    (3) Orders marked Do Not Display. At each price point up to their
limit prices, limit orders marked Do Not Display, as defined under
Article 1, Rule 2(c)(2), shall be ranked based on their sequence
numbers by the Exchange's Matching System, but shall be ranked after
all orders as described under subparagraphs (b)(1) and (b)(2) above.

    Amended paragraph (b)(3) is substantively similar to current
paragraph (b)(3), with amendments to explicitly refer to the ranking of
orders at each price point up to its limit price, to clarify that the
paragraph applies to the ``orders marked Do Not Display,'' \76\ to
replace ``times of receipt'' with the more accurate ``sequence
numbers,'' and to clarify that orders marked Do Not Display are ranked
orders in display statuses 1 and 2.
---------------------------------------------------------------------------

    \76\ The only ``orders that are not displayed at all'' are limit
orders marked Do Not Display. See CHX Article 1, Rule 2(c)(2). See
id.
---------------------------------------------------------------------------

    The following Examples 17-19 illustrate how orders are currently
ranked on the CHX book, as clarified by the proposed amendments:
    Example 17. Assume that the CHX book is empty with respect to
security XYZ and the NBBO for security XYZ is $10.00 x $10.02. Assume
then that the Matching System accepts a limit order to buy 100 shares
of security XYZ at $10.00/share marked Do Not Display and the order is
assigned a sequence number of ``1'' (``Bid 1'').
    In this situation, Bid 1 would be ranked on the CHX book as follows
(values in parentheses indicate size): \77\
---------------------------------------------------------------------------

    \77\ Examples 17-22 represent order execution priority at each
price point up to the order's limit price, which starts on the far
right from top to bottom, then from right to left.
[GRAPHIC] [TIFF OMITTED] TN25SE14.001

    Pursuant to amended paragraph (b)(3), Bid 1 would be ranked at each
price point up to its limit price of $10.00 and allocated to display
status pool 3 for limit orders marked Do Not Display.\78\
---------------------------------------------------------------------------

    \78\ The Working Price of Bid 1 would be $10.00 as the limit
price of the Bid 1 is at the NBB. See supra note 73.
---------------------------------------------------------------------------

    Example 18. Assume the same as Example 17 and while Bid 1 is
resting on the CHX book, the Matching System accepts a limit order to
buy 50 shares of security XYZ at $9.99/share that is ``fully-
displayable'' and the order is assigned a sequence number of ``2''
(``Bid 2'').
    In this situation, Bid 2 would be ranked on the CHX book as
follows:
[GRAPHIC] [TIFF OMITTED] TN25SE14.002

    Pursuant to amended paragraph (b)(1), Bid 2 would be ranked at each
price point up to its limit price of $9.99 and allocated to display
status pool 1 for fully-displayable limit orders. However, as
discussed below, although Bid 2 represents the CHX BO, it cannot be
displayed because it is for an Odd Lot and cannot be aggregated with
other Odd Lots or Mixed Lots to be displayed as a Round Lot. This,
however, has no bearing on its rank on the CHX book.
    Example 19. Assume the same as Example 18 and while Bid 1 and Bid 2
are resting on the CHX book, the Matching System accepts a limit order
to buy 500 shares of security XYX at $10.00/share that is marked
Reserve Size, with a displayable amount of 100 shares, refresh
threshold of 0, and the order is assigned a sequence number 3.
    In this situation, Bid 3 would be ranked on the CHX book as
follows:
[GRAPHIC] [TIFF OMITTED] TN25SE14.003

    Pursuant to amended paragraph (b)(1), the 100 shares of Bid 3 that
represent the displayed portion of Bid 3 will be ranked at each price
point up to its limit price of $10.00 and allocated to display status
pool 1 for fully-displayable orders and displayed portions of
Reserve Size orders. Thus, the displayed portion of Bid 3 will be
ranked ahead of Bid 1 at every price point up to $10.00. However, given
that Bid 3 has an inferior sequence number to Bid 2, Bid 3 will be
ranked behind Bid 2 at each price point up to $9.99. Since Bid 2 has a
limit price of $9.99, the displayed portion of Bid 3 will be at the top
of the CHX book at the $10.00.
    Pursuant to amended paragraph (b)(2), the 400 shares of Bid 3 that
represent the undisplayed portion of the Bid 3 will be ranked at each
price point up to

its limit price of $10.00 and allocated to display status pool
2 for undisplayed portions of Reserve Size orders. Thus, the
undisplayed portion of Bid 3 will be ranked ahead of Bid 1, but behind
the displayed portion of Bid 3 and Bid 2 up to $9.99 and behind the
displayed portion of Bid 3 only at $10.00.
    Amended paragraph (b)(4) clarifies how Reserve Size orders are
handled for ranking purposes when the displayed portion is refreshed
and states as follows:
    (4) Refreshed portions of Reserve Size orders. When the displayed
portion of a Reserve Size order reaches a threshold set by the
Participant submitting the order (the ``submitting Participant''), the
displayed portion of the order shall be refreshed to the original
displayed quantity (or with the remaining number of shares, if less)
and the undisplayed portion of the order shall be decremented by that
number of shares. The refreshed displayed portion of the Reserve Size
order shall receive a new display sequence number based on the time at
which it was refreshed, whereas any remaining undisplayed portion of
the Reserve Size order shall retain its original sequence number.
    Correspondingly, the Exchange proposes to amend Article 20, Rule
2(c)(3), which defines the ``Reserve Size'' modifier to add that the
refreshed displayed portions of Reserve Size orders shall be ranked in
the CHX book pursuant to amended Article 20, Rule 8(b)(4).
    Amended paragraph (b)(4) is substantively similar to current
paragraph (b)(4), with amendments to describe the ranking of the
Reserve Size orders in terms of ``sequence numbers,'' so as to be
consistent with the foregoing proposed amendments to paragraph (b).
That is, amended paragraph (b)(4) clarifies that when the displayed
portion of a Reserve Size order is refreshed, the refreshed displayed
portion will receive a new sequence number and lose priority to all
other orders in the first display status pool, whereas the undisplayed
portion will retain its original sequence number and retain its
original priority in display status pool 2. The following
Example 20 illustrates how the refreshed Reserve Size orders are
currently treated, as clarified by the proposed amendment:
    Example 20. Assume the same as Example 19. Assume then that Bid 2
is cancelled by the order sender and soon thereafter, the Matching
System accepts a limit order to buy 500 shares of security XYX at
$10.00/share that is marked Reserve Size, with a displayable amount of
100 shares, with a refresh threshold of 0, and the order is assigned a
sequence number 4.
    In this situation, Bid 3 would be ranked on the CHX book as
follows:
[GRAPHIC] [TIFF OMITTED] TN25SE14.004

    Assume then that the Matching System receives an incoming limit
order to sell 100 shares of security XYZ at $10.00/share that is marked
IOC.
    In this situation, the incoming offer would execute against the
full displayed portion of Bid 3 at $10.00/share. Pursuant to amended
paragraph (b)(4), the displayed portion of Bid 3 would then be
refreshed to 100 shares and would receive a new sequence number
reflecting the time of the refresh, while the undisplayed portion of
Bid 3 would be decremented by 100 shares and would retain its original
sequence number.
    Thus, Bid 3 would now be ranked on the CHX book as follows:
    [GRAPHIC] [TIFF OMITTED] TN25SE14.005

    This chart clearly shows that the refreshed display portion of Bid
3 loses priority to the displayed portion of Bid 4, but the undisplayed
portion of Bid 3 maintains priority over the undisplayed portion of Bid
4.
    Amended paragraph (b)(5) describes the impact of change of size or
price to an order and states as follows:
    (5) Other changes in order size or price. When a Participant
reduces the number of shares in an order, the order will continue to be
ranked at the price and time at which it was originally received. When
a Participant increases the number of shares in an order, the order
will be ranked at the original limit price, but shall receive a new
ranking based on the time at which shares were added to the order. Any
change in the price of an order shall result in a new ranking for the
order based on the new limit price and the time at which the price
change was received. Any change to the display instruction associated
with an order (including, but not limited to, a change that identifies
an order as Reserve Size or Do Not Display) must be submitted as a new
order and shall be ranked based on the time at which the new order was
received.
    Amended paragraph (b)(5) is virtually identical to current
paragraph (b)(5), with proposed amendments to replace the term
``instruction'' with the more accurate ``modifier,'' to capitalize the

term ``Reserve Size,'' and to replace ``undisplayed orders'' with the
more accurate term ``Do Not Display.''
    Amended paragraph (b)(6) describes which orders are displayed and
how certain Odd Lot and Mixed Lot orders are handled for display
purposes and states follows:
    (6) Displayed CHX Best Bid and Offer. Except as provided in Rule 5
above, all orders or portions of orders described under paragraph
(b)(1) above that constitute the best bid(s) or offer(s) in the
Matching System in each security, the display of which would not
violate Rule 610 under Regulation NMS (``displayable CHX BBO''), shall
be immediately and publicly displayed through the processes set out in
the appropriate reporting plan for each security, provided that the
displayable CHX BBO is for at least a Round Lot. The displayable CHX
BBO for a security shall only be displayed in multiples of a Round Lot.
If the displayable CHX BBO for a security is for an Odd Lot, it shall
not be displayed, but the bids or offers that constitute the
undisplayed yet displayable CHX BBO shall maintain their execution
priority pursuant to paragraph (b)(1) above. If the displayable CHX BBO
for a security is for a Mixed Lot, it shall be rounded down to the
nearest integer multiple of a Round Lot for display purposes only and
the displayable yet undisplayed Odd Lot remainder(s) shall maintain
their execution priority pursuant to paragraph (b)(1) above.
    Amended paragraph (b)(6) is substantively identical to current
paragraph (b)(6), but changes the way order aggregation for display
purposes is described and deletes surplus language already included in
the foregoing paragraphs. In sum, amended paragraph (b)(6) makes clear
the distinction between aggregation of orders for display purposes and
the rank of individual orders on the CHX book. Specifically, it
clarifies that the CHX BBO can only be displayed in Round Lots or
multiples of Round Lots and Odd Lot and Mixed Lot orders will be
displayed to the extent that they can be aggregated together into a
multiple of a Round Lot. The amended paragraph further clarifies that
order rank will not be affected by aggregation of orders for display
purposes as described under amended paragraphs (b)(1)-(5).
    Amended paragraph (b)(7) replaces current language concerning the
execution priority of price slid orders, with language describing how
unexecuted remainders of routed orders would be ranked on the CHX book,
as discussed above.\79\ The Exchange submits that the current language
is redundant of the proposed amendments to the CHX Only modifier and
automated matching of orders, both described below, because all orders,
regardless of whether or not they are subject to any price sliding
functionality, would be executed at its ``Working Price,'' which the
Exchange proposes to adopt in the CHX rules as a defined term.\80\
---------------------------------------------------------------------------

    \79\ See supra Examples 14-16.
    \80\ See supra note 73.
---------------------------------------------------------------------------

    Amended paragraph (d)(1) clarifies how orders resting on the CHX
book are currently executed and states as follows:
    (1) Except for certain orders which shall be executed as described
in Rule 8(e), below, an incoming order shall be matched against one or
more resting orders in the Matching System, in the order in which the
resting orders are ranked on the CHX book, pursuant to Rule 8(b) above,
at the Working Price of each resting order, as defined under Article 1,
Rule 1(pp), for the full amount of shares available at that price, or
for the size of the incoming order, if smaller.
    Amended paragraph (d)(1) is substantively identical to current
paragraph (d)(1), with amendments to clarify that orders are executed
according to their rank on the CHX book, pursuant to amended paragraph
(b), and at the Working Price of each resting order, as defined under
proposed Article 1, Rule 1(pp).\81\ The Working Price of a resting
order that is not eligible for price sliding will always be its limit
price, whereas the Working Price of a resting order that is eligible
for price sliding will be the most aggressive price at which the order
can execute, depending on the prevailing NBBO for the subject
security.\82\ The following Examples 21-23 illustrate how orders
resting on the CHX book are currently executed:
---------------------------------------------------------------------------

    \81\ Id.
    \82\ Id.
---------------------------------------------------------------------------

    Example 21. Assume the same as Example 20 above, that the NBBO for
security XYZ is $10.00 x $10.01, and that the Exchange is the only
market at the NBB displaying 200 shares at $10.00.
    The CHX book as to security XYZ looks like this:
    [GRAPHIC] [TIFF OMITTED] TN25SE14.006

    Assume then that after the displayed portion of Bid 3 is refreshed,
the Matching System receives an incoming limit order to sell 1000
shares of security XYZ at $10.00/share. In this situation, since the
size of the incoming offer is equal to the total number of shares
represented by all resting bids at $10.00, the incoming offer would
execute against all resting bids on the CHX book at the Working Price
of the resting orders, which are their limit prices because they have
not been price slid, in the following order: 4(100), 31 (100), 3(300),
4(400), 1(100).
    Example 22. Assume the same as Example 21, except that the CHX book
is empty with respect to security XYZ, and the NBBO for security XYZ is
$9.99 x $10.00. Assume then that the Matching System accepts two orders
in quick succession. The first order is a Routable Order to buy 100
shares of security XYZ at $9.99/share (not eligible for NMS Price
Sliding) and is assigned a sequence number of ``5'' (``Bid 5''). The
second order is a limit order to buy 100 shares of security XYZ at
$10.01/share marked CHX Only (eligible for NMS Price Sliding) \83\ and
is assigned a sequence number of ``6'' (``Bid 6''). In this situation,
pursuant to paragraph (b)(1), Bid 5 would be ranked at every

price point up to its limit price of $9.99 and Bid 6 would be ranked at
every price point up to its limit price of $10.01. However, since the
display of Bid 6 at $10.01 would cross the NBO in violation of Rule
610(d) of Regulation NMS, Bid 6 would be price slid and would only be
executable at the NBO locking price of $10.00 (i.e., Working Price) and
displayable at one price increment below the NBO, at $9.99. The
Matching System would then aggregate Bids 5 and 6 for display purposes,
pursuant to amended paragraph (b)(6), and display a CHX Protected Bid
at $9.99 for 200 shares of security XYZ. However, the bids would
receive order execution priority as follows:
---------------------------------------------------------------------------

    \83\ See CHX Article 1, Rule 2(b)(1)(C).
    [GRAPHIC] [TIFF OMITTED] TN25SE14.007

    Thus, Bid 6 would have a Working Price of $10.00/share and Bid 5
would have a Working Price of $9.99/share, which is its limit price.
That is, if the Matching System then accepted an incoming offer for 200
shares of security XYZ priced at $9.99/share, the incoming offer would
first execute 100 shares against Bid 6 at $10.00/share, then against
Bid 5 at $9.99/share.
    Example 23. Assume the same as Example 22, except that prior to the
Matching System receiving an incoming offer for 200 shares of security
XYZ priced at $9.99/share, the Upper Price Band for security XYZ moved
to $9.99. As such, order could not be executed at a price more
aggressive than $9.99 and the bids would receive order execution
priority as follows:
[GRAPHIC] [TIFF OMITTED] TN25SE14.008

    Thus, both Bid 5 and Bid 6 would have a Working Price of $9.99/
share. Thus, if the Matching System then accepted an incoming offer for
200 shares of security XYZ priced at $9.99/share, the incoming offer
would first execute 100 shares against Bid 5 at $9.99/share, then
against Bid 6 at $9.99/share.
    Amended paragraph (d)(3) reflects changes to the handling of Odd
Lot orders pursuant to the proposed CHX Routing Services and states as
follows:
    (3) Odd Lot orders and unexecuted Odd Lot remainders that are
unable to be immediately displayed according to Rule 8(b)(6) above
(because they are at a price that is better than the current CHX quote)
shall be posted to, remain in, or be routed or cancelled from, the
Exchange's Matching System according to the attached order modifiers.
Orders remaining in the Matching System will continue to be ranked at
the price and time at which they were originally received.
    Specifically, pursuant to proposed Article 19, Rule 3(a), amended
paragraph (d)(3) adds that Odd Lot orders could be posted to, or routed
away from, the Matching System, in addition to either remaining in, or
being cancelled from, the Matching System.\84\ Also, amended paragraph
(d)(3) replaced the phrase ``Participant's instruction,'' with the more
technically accurate ``order modifiers.'' Moreover, as discussed above,
the Exchange proposes to delete reference to current Article 20, Rule
8(h) in current paragraph (d)(3), as the Exchange proposes to delete
Article 20, Rule 8(h) in its entirety as obsolete.
---------------------------------------------------------------------------

    \84\ Incoming or resting Odd Lots priced at the CHX BBO that
could not be aggregated with other orders for display purposes will
be cancelled by the Matching System if it is marked Always Quote, as
defined under CHX Article 1, Rule 2(c)(1).
---------------------------------------------------------------------------

    The Exchange proposes to amend paragraph (d)(4) to adopt style
edits and to provide additional detail as to how the Matching System
currently handles orders that are subject to Rule 201 of Regulation
SHO. Specifically, in order to clarify the scope of the rule, the
Exchange proposes to entitle the paragraph ``Rule 201 of Regulation
SHO.'' The Exchange also proposes to capitalize all references to
``Trading Center,'' as the Exchange now proposes to define the term in
the CHX rules; \85\ to replace reference to ``short sale'' orders with
``Sell Short,'' as short sale orders are, more accurately, limit orders
marked Sell Short, as defined under Article 1, Rule 2(b)(3)(D); to
insert a cross-reference to Article 1, Rule 2(b)(3)(E), which defines
``Short Exempt''; and to replace the current citation to Article 20,
Rule 8(h) with a citation to proposed Article 19, Rule 3, which details
the proposed Routing Events. Also, given that current Rule 8(d)(4)
addresses exceptions to the short sale price test restriction, as
provided under Rules 201(b)(1)(iii)(A) and (B) of Regulation SHO, the
Exchange proposes to adopt those citations in the amended rule.\86\
---------------------------------------------------------------------------

    \85\ See supra note 5.
    \86\ Rule 201(b)(1)(iii)(A) of Regulation SHO provides the
Exchange's policies and procedures must be reasonably designed to
permit ``the execution of a displayed short sale order of a covered
security by a trading center if, at the time of initial display of
the short sale order, the order was at a price above the current
national best bid.''

---------------------------------------------------------------------------

    In addition, the Exchange proposes to adopt language that clarifies
how the Matching System currently applies the Rule 201(b)(1)(iii)(A)
exception to resting limit orders marked Sell Short and Reserve Size.
The proposed language provides that the Rule 201(b)(1)(iii)(A)
exception shall also apply to resting limit orders marked Sell Short
and Reserve Size, as defined under Article 1, Rule 2(c)(3), and,
pursuant to the exception, such orders shall be permitted to execute at
its initially displayed price, up to its full size, including the
undisplayed portion, during one order-matching event.\87\ The proposed
language also provides that Reserve Size orders may not be modified or