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February 1, 2001

CHX Ends Automation On Certain Limit Orders

By Peter Chapman

In another retrenchment forced by decimalization, the Chicago Stock Exchange (CHX) is no longer solely executing certain orders automatically. Limit orders "traded through" on another exchange may now also be filled manually by CHX dealers rather than only automatically by the exchange's MAX system.

The change is intended to help specialists cut their exposure to losses on large limit orders. The rule change was filed by the CHX in September 2000 and approved by the Securities and Exchange Commission last month.

The CHX is worried that, once decimal trading spreads to all stocks, many small orders will execute at multiple price levels throughout the day. That could lead to an upsurge in inadvertent trade-throughs, or executions on competing exchanges at prices better than those of the CHX limit orders. That, in turn, could result in "unwarranted" automatic executions of large limit orders in specialists' books, potentially causing great losses.

Until recently, MAX automatically executed those orders, often against the specialists' own inventory. Specialists may now elect to execute the orders automatically or manually on a stock-by-stock basis.

The move by the CHX comes on the heels of its decision to reduce the number of orders eligible for automatic price improvement by SuperMAX, a system within MAX. The exchange granted its specialists the discretion to set their own price improvement parameters for large orders. That switch was also brought on by the industry's changeover to decimal trading.