Chicago Stock Exchange
Encyclopedia
The Chicago
Chicago
Chicago is the largest city in the US state of Illinois. With nearly 2.7 million residents, it is the most populous city in the Midwestern United States and the third most populous in the US, after New York City and Los Angeles...

 Stock Exchange
(CHX) is a stock exchange
Stock exchange
A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...

 in Chicago, Illinois
Illinois
Illinois is the fifth-most populous state of the United States of America, and is often noted for being a microcosm of the entire country. With Chicago in the northeast, small industrial cities and great agricultural productivity in central and northern Illinois, and natural resources like coal,...

, USA. The exchange is a national securities exchange and self-regulated organization, which operates under the oversight of the U.S. Securities and Exchange Commission (SEC). The Chicago Stock Exchange is the third most active stock exchange in the United States by volume, and the largest outside New York City. The Chicago Stock Exchange is currently located at 440 South LaSalle Street
LaSalle Street
LaSalle Street is a major north-south street in Chicago named for Sieur de La Salle, an early explorer of Illinois. The portion that runs through the Loop is considered to be Chicago's financial district...

 (One Financial Place
One Financial Place
One Financial Place is a 515ft tall skyscraper in Chicago, Illinois. It was completed in 1985 and has 39 floors. Skidmore, Owings & Merril designed the building, which is tied with 401 East Ontario as the 78th tallest building in Chicago....

).

History

The Chicago Stock Exchange was founded in a formal meeting on March 21, 1882. At this time, Charles Henrotin was elected the chairman and president. In April that year, a lease was taken out at 115 Dearborn Street for the location of the exchange and during that month 749 memberships were sold.
In July 1914, the Exchange closed as a result of World War I
World War I
World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...

, and remained closed until December 11. In October 1915, the basis of quoting and trading in stocks changed from percent to par value to dollars. On April 26, 1920, the Chicago Stock Exchange Stock Clearing Corporation was established. On October 29, 1929, the stock market crashed, resulting in a very difficult time period for the Chicago Stock Exchange, and the stock market in general.

In May 1933, the Securities Act of 1933
Securities Act of 1933
Congress enacted the Securities Act of 1933 , in the aftermath of the stock market crash of 1929 and during the ensuing Great Depression...

 was enacted. This act provided full disclosure to investors to prohibit fraud in connection with the sales of securities. The following year, the Securities Exchange Act of 1934
Securities Exchange Act of 1934
The Securities Exchange Act of 1934 , , codified at et seq., is a law governing the secondary trading of securities in the United States of America. It was a sweeping piece of legislation...

 was enacted, which regulated securities trading and established the Securities & Exchange Commission (SEC). In 1949, the CHX merged with the exchanges of St. Louis, Cleveland and Minneapolis/St. Paul to form the Midwest Stock Exchange. On September 29, 1952, the trading hours were changed to 10 a.m. – 3:30 p.m., and there was no Saturday trading. In 1959, the New Orleans Stock Exchange became part of the Midwest Stock Exchange, and in the early 1960s the Midwest Stock Exchange Service Corporation was established to provide centralized accounting for member firms.

On May 11, 1973, the Midwest Securities Trust Company (MSTC) was established to provide a central depository for securities certificates and to electronically record transfers of stock ownership. In October of the next year, trading hours at the stock exchange were extended to 4pm, and in the following year, a fixed commission system was abolished. In April 1978, the Chicago Stock Exchange launched an Intermarket Trading System (ITS), a system that allows order to be sent from one exchange to another to ensure that customers receive the best execution available.

In the 1980s, the Chicago Stock Exchange made several technological advancements to improve trading. In 1982, the CHX launched the MAX system, which allowed them to be one of the first stock exchanges to provide fully automated order execution. In 1987, the CHX implemented programs to trade Nasdaq
NASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...

 securities.

In the 1990s, the Exchange had a rebirth, and in 1993 changed its name back to the Chicago Stock Exchange (after being the Midwest Stock Exchange), reflecting its roots and identity within the Chicago financial community. In June 1995, securities settlement dates were shortened from five to three business days following trade date and one year later, the CHX extended its trading hours. The Exchange is now open thirty minutes after the primary market closes. In 1997 the Chicago Stock Exchange began trading exchange-traded funds (ETFs).

At the beginning of the new millennium, several major changes occurred. In April 2001, decimal pricing of all stocks was fully implemented. In 2005, the SEC approved a change of the ownership structure of the CHX from a not-for-profit, member-owned company to a for-profit, stockholder-owned corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...

. In that same year, the CHX implemented the Electronic Book trading platform; the predecessor technology of the New Trading Model’s Matching System. In 2006 the Exchange announced regulatory and shareholder approval of an investment in CHX by Bank of America Corporation, Bear Stearns
Bear Stearns
The Bear Stearns Companies, Inc. based in New York City, was a global investment bank and securities trading and brokerage, until its sale to JPMorgan Chase in 2008 during the global financial crisis and recession...

, E*TRADE FINANCIAL Corporation, and Goldman, Sachs & Co. Just last year on February 1, the CHX announced that it has completed the migration to the New Trading Model platform.

Operation and trading

The CHX operates as a direct and wholly owned subsidiary of CHX Holdings, Inc., a Delaware corporation. Previously, the Exchange had been constituted as a membership organization which a “seat” on the Exchange conferred both a fractional ownership
Fractional Ownership
In business, fractional ownership is a percentage share of an expensive asset. Shares are sold to individual owners. A fractional owner enjoys priorities and privileges, such as reduced rates, priority access on holidays and income sharing. Typically, a company manages the asset on behalf of the...

 interest as well as the privilege to trade on the floor. The CHX operates a fully electronic Matching System and provides routing to CHX Institutional Brokers and off-Exchange market maker
Market maker
A market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn. From a market microstructure theory standpoint, market makers are net sellers of an option to be...

s. The CHX Matching System has been designed to provide broker/dealers with cost efficient executions.

CHX Holding, Inc.

On February 9, 2005, CHX's demutualization plan took effect and CHX (formerly a not-for-profit, non-stock corporation owned by its members) became a wholly owned subsidiary of a holding company, CHX Holdings, Inc. CHX Holdings was formed as a for-profit, stock corporation owned by its shareholders, the former member-owners of CHX. The demutualization plan was approved by CHX's Board of Governors on August 5, 2004, by its members on November 11, 2004 and by the SEC on February 8, 2005. Under the new demutualized structure, CHX continues to operate as a national securities exchange, registered with the SEC.

Trading on the CHX

Publicly traded companies do not need to be listed on the CHX to be traded here. SEC rules allow the CHX to trade stocks listed on other exchanges. Stocks eligible for trading in the CHX Matching System will include NYSE, AMEX and NASDAQ-listed securities.

The CHX Matching System and CHXConnect are execution and routing services operated by the Chicago Stock Exchange. The Matching System provides fully automated cost efficient executions for a wide array of securities and is designed for the messaging rates of today’s trading environment. CHXConnect provides routing services to order-sending participants to off-Exchange Market Makers or other destinations.

There are two trading sessions each day. The first or regular trading session begins at 8:30 AM and ends at 3 PM (Central Time) except for specified exchange-traded funds, which trade until 3:15 PM. The second session, or late trading session, commences immediately after the close of the regular session and will end at 4 PM. Only cross orders with the exception of mid-point cross orders are eligible for the late trading session.

Matching System

The Chicago Stock Exchange’s (CHX) Matching System trading platform has been designed for full electronic trade matching
Electronic trade matching
Electronic trade matching is a process whereby a computer system matches buy and sell orders for a security on a stock market or commodities market. Electronic trade matching was introduced in the early 1990s in the United States to supplement open outcry trading...

 and constructed to provide fully electronic cost efficient executions. CHX’s trading platform
Electronic trading platform
In finance, an Electronic trading platform is a computer system that can be used to place orders for financial products over a network with a financial intermediary. This includes products such as shares, bonds, currencies, commodities and derivatives with a financial intermediary, such as a...

 offered US broker-dealer
Broker-dealer
A broker-dealer is a term used in United States financial services regulations. It is a natural person, a company or other organization that trades securities for its own account or on behalf of its customers....

s access to a fair, open and neutral market place with diverse order flow from retail brokers, CHX Institutional Brokers, NASD market makers and CHX market makers.

The new platform is scalable, reliable and designed for the messaging rates of today’s equity trading environment. The new CHX Matching System performance characteristics should exceed the requirements for classification as an automated market under Regulation NMS.

Order-sending participants may route to the CHX Matching System by using the FIX and CMS protocols via existing order-sending participant or vendor connections.

Upon receipt of an order, the CHX Order Management System (OMS) will validate and route orders to the appropriate matching engine instance. Several matching instances will each handle processing for a set of issue symbols, which can be reallocated among matching engines to re-grade processing loads.

Once the matching engine receives an order, the order’s price is compared with resting limit orders in the book. If a match can be consummated at a price within the NBBO then the orders will be executed.

If the execution would occur at a price outside the NBBO then no execution will occur and the inbound order will be rejected. If no match is available, then an inbound order will be placed in the book and immediately quoted. If the order’s price would lock or cross the NBBO then the order will be rejected.

Orders resting in the book will be matched in price - time priority and according to the ranking.
The Matching System matches orders on a share for share basis and inbound odd lot orders can match at prices outside the NBBO.

CHXConnect

As part of the Exchange’s new trading model, CHX operates a neutral communications service, the CHXConnect, that allows its participants to route orders to any connected destination. This service allows participants to route orders to market makers or other broker-dealers connected to CHXConnect, which provide order handling and execution services in the over-the-counter market; and to other destinations (including order-routing vendors) that are connected. Participants also use CHXConnect to route orders to the Exchange’s Matching System and to its institutional brokers.

Governance

The Chicago Stock Exchange is dedicated to maintaining corporate governance standards that ensure that the interests of public investors and the Exchange’s members are represented in vital areas of the Exchange’s operations. This careful balancing of interests is an integral part of the Exchange’s structure.

The Exchange has an executive board [link below] that is in charge of all the Exchange’s procedures. The Exchange’s operations are also overseen by a 12-person Board of Directors [link below] which consists of six public directors, five participant directors, and the chief executive officer. A public director is a director who (i) is not a participant, or an officer, managing member, partner or employee of a participant firm; (ii) is not an employee of the CHX or any of its affiliates; (iii) is not a broker or dealer, or an officer or employee of a broker or dealer; and (iv) does not have any other material business relationship with (a) CHX, CHX Holdings or any of their affiliates or (b) any broker or dealer. Whereas a participant director is an individual participant or an officer, managing member or partner of a participant firm.12 directors are divided into three equal classes; each class serves a three-year term and there is one STP participant director in each class.

Nominating & Governance Committee

The directors are elected by the Exchange’s sole shareholder, CHX Holdings, Inc. Each year, the exchange’s nominating committee initially identifies candidates for the open STP participant director positions on the board; the exchange’s participants can add names to that list by petition. If names are added to the slate, the exchange’s participants vote on the candidates. The persons receiving the highest number of votes will be elected as STP participant directors on the Board. Public directors and other participant directors are nominated by the nominating committee, but are not subject to the petition process described above. The exchange’s board members receive relatively modest compensation for their service.

The exchange’s nominating committee is equally balanced between public and participant representatives. Four people serve on the committee – two public directors and two participant directors. Each of the participant directors must be an STP participant director and one of these participant directors must not be a representative of a firm that holds Series A Preferred Stock in CHX Holdings, the exchange’s parent company. The committee is appointed each year by the exchange’s board of directors.
The nominating committee nominates candidates to positions on the board of directors and addresses issues associated with the governance of the exchange.
The nominating committee typically begins its work early in the year. Under the exchange’s bylaws, the committee must hold at least two open meetings to allow exchange participants to recommend potential candidates for STP participant director positions. The committee also consults with both the exchange’s chairman and CEO about the needs of the exchange and typically solicits recommendations from other board members.
Once the nominating committee has held its open meetings, it deliberates in closed sessions. The slate must be approved by a majority vote. Each year, the nominating committee initially identifies candidates for the open STP participant director positions on the board; the exchange’s participants can add names to that list by petition. If names are added to the slate, the exchange’s participants vote on the candidates. The persons receiving the highest number of votes will be elected as STP participant directors on the board. Public directors and other participant directors are nominated by the nominating committee, but are not subject to the petition process described above.

Current Board of Directors Feb 2008
Name Current position
Michael H. Kerr Chairman
David L. Grove Vice Chairman
William R. Atwood Illinois State Board of Investment
Matthew D. Frymier Banc of America Strategic Capital
Matthew Lavicka Goldman, Sachs & Co.
Corinne Wood
Corinne Wood
Corinne J. Wood served as the 44th Lieutenant Governor of the US state of Illinois from 1999 to 2003. Graduating Phi Beta Kappa from the University of Illinois and Loyola University School of Law, Wood was named general counsel to the Illinois Commissioner of Banks and Trusts.-Background:Born as...

Former Lieutenant Governor, State of Illinois
David A. Herron CHX Chief Executive Officer
Kruno Huitzingh InVerity, LLC
Michael H. Kerr Kirkland & Ellis
Kirkland & Ellis
Kirkland & Ellis LLP is an international law firm with headquarters in Chicago, known for its profitability and its litigation, bankruptcy, intellectual property and private equity departments. Kirkland & Ellis is currently ranked as the ninth most prestigious law firm in the United States by...

Russell J. Saletta RJS Investments Ltd.
David L. Grove E*Trade Capital Markets LLC
David M. Kelly Retired President & CEO, National Securities Clearing Corporation
Brett W. Redfearn Bear Stearns & Co., Inc.
Ben A. Witt The Oak Tree Group, LLC

External links

The source of this article is wikipedia, the free encyclopedia.  The text of this article is licensed under the GFDL.
 
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