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January 1, 2001

Chicago Exchange Move For Price Improvement

By Peter Chapman

In a bid to stay competitive in the evolv ing world of decimal trading the Chicago Stock Exchange (CHX) is revamping its price improvement services. The move follows similar changes made by third market rivals Bernard L. Madoff Investment Securities and the Knight Capital Markets division of Knight Trading Group.

The CHX, pending approval by the Securities and Exchange Commission, plans to launch its SuperMAX 2000 platform. That platform gives automatic one-cent price improvement to all eligible 100-share orders, but allows the 19 individual specialists to set their own rates for larger orders on a stock-by-stock basis. Currently, specialists must conform to a four-tier SuperMAX program that boxes them into pre-determined price improvement parameters.

"We told the specialists they must provide a base amount of price improvement," said Paul O'Kelly, the exchange's executive vice president for market regulation and legal affairs. "But over and above that [they] can provide any amount [they] choose."

Looser parameters should allow the CHX specialists to operate more effectively. Nonetheless, they could hurt the exchange's marketing efforts. Both Knight and Madoff offer clients uniform price improvement schedules. The CHX won't be able to under SuperMAX 2000.

Knight price improves most decimal-trading S&P 500 stocks by one cent if, for example, the best bid-offer spread is between two cents and nine cents. That rate applies to all trades up to 999 shares, or double the displayed size, whichever is less.

Madoff improves the quote on S&P 500 stocks by 20 percent of the spread or one cent, whichever is greater. That applies to all trades up to 3,000 shares, or triple the displayed size, whichever is less.