[Federal Register Volume 59, Number 19 (Friday, January 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-1813]
[Federal Register: January 28, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33500; File No. SR-MSE-93-05]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Midwest Stock Exchange, Inc. Relating to Agency Crosses
Between the Disseminated Exchange Market
January 21, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March 2,
1993, the Midwest Stock Exchange, Inc. (``MSE,'' ``Exchange'' or
``Chicago Stock Exchange'')\1\ filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I, II and III below, which Items have been prepared by the self-
regulatory organization. On December 10, 1993, the MSE submitted to the
Commission Amendment No. 1 to the proposed rule change in order to
summarize and respond to a comment letter it received in opposition to
this proposal.\2\ The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\As of July 8, 1993, the Midwest Stock Exchange, Inc.
(``MSE'') changed its name to the Chicago Stock Exchange, Inc.
(``CHX''). See Securities Exchange Act Release Nos. 32488 (June 18,
1993), 58 FR 34284 (June 24, 1993) (File No. SR-SME-93-13)
(immediate effectiveness of proposed rule change to amend the MSE's
Certificate of Incorporation and Constitution to effect a name
change) and 32489 (June 18, 1993), 58 FR 34285 (June 24, 1993) (File
No. SR-MSE-93-16) (immediate effectiveness of proposed rule change
to make conforming changes to the MSE Rules).
\2\See letter from David T. Rusoff, Foley & Lardner, to Beth A.
Stekler, Attorney, Division of Market Regulation, SEC, dated
December 9, 1993 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The MSE proposes to add an ``Interpretation and Policy'' to Article
XX, Rule 23 of its Rules which would allow MSE floor brokers to
``cross'' stock on the Exchange floor without the possibility of break-
up by a specialist under certain circumstances. The policy would apply
where a broker has an order to buy and an order to sell the same stock
at a price between the disseminated Exchange market.
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 self-regulatory organization
included statements concerning the purpose of an basis for the proposed
rule change 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 self-regulatory organization 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 Change
1. Purpose
The purpose of the proposed rule change is to increase the
possibility of immediate execution of agency crosses\3\ on the Exchange
when the cross price is between the disseminated MSE market.
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\3\For purposes of this proposal, the Exchange has defined an
agency cross to be a cross where neither the order to buy nor the
order to sell is for the account of any member or member
organization (i.e., including, but not limited to, the member or
member organization executing the cross). Telephone conversation
between David T. Rusoff, Foley & Lardner, and Beth A. Stekler,
Attorney, Division of Market Regulation, SEC, on January 5, 1994.
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At present, Exchange rules require members, or member
organizations, with both an order to buy and an order to sell the same
security to offer publicly such security at a price which is higher
than the bid by the minimum variation permitted in such security
(generally an \1/8\th) before making a transaction with himself, or
itself. The ability of specialists, in particular, to participate in
agency crosses, even when they are not disseminating a bid or offer at
the cross price, greatly decreases the likelihood of immediate
execution of the cross orders for order sending firms. The proposed
rule change therefore is designed to give order sending firms greater
assurances that their cross orders will be executed quickly and without
interference.
Because this proposal addresses only the circumstances under which
an MSE specialist must refrain from participating in a cross
transaction, the proposal would not excuse members from the requirement
to bid and offer stock as set out in Rule 23. As such, the proposal
would still permit a member in the crowd to participate at the cross
price, or better, during the bidding and offering at the post. However,
a specialist would not be permitted to interfere with the cross during
the bidding and offering at a price which he is not currently
disseminating in his quote.\4\ However, a specialist could participate
in the cross at the cross price if he was previously sought out for
assistance in executing any part of the cross trade.
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\4\Conversely, this proposal would allow a specialist who has a
disseminated bid or offer at the cross price to participate at that
cross price, even in a size greater then the specialist's
disseminated market. Telephone conversation between David T. Rusoff,
Foley & Lardner, and Beth A Stekler, Attorney, Division of Market
Regulation, SEC, on December 20, 1993.
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Under the proposed rule, a customer order in the book could not be
``disadvantaged'' by a cross transaction because the proposal would
apply only to crosses at prices between the disseminated Exchange
market. Moreover, the Exchange's existing rules of priority and
precedence would not be affected in any way under this proposal.
Therefore, even though a specialist would be precluded from
participating with a cross at a price between his disseminated market,
he would still be required to satisfy orders in this book at the cross
price, even if those orders are not being disseminated through an
oversight on the part of the specialist.
Finally, the proposed rule would apply to only floor-brokered
orders where neither order is for the account of a member or member
organization.\5\ The proposed rule would apply to all agency crosses
regardless of size.
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\5\See supra, note 3.
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2. Statutory Basis
The proposed rule change is consistent with Section 6(b)(5) of the
Act, in that it is designed to promote just and equitable principles of
trade, to remove impediments to and to perfect the mechanism of a free
and open market and a national market system, and, in general, to
protect investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes that no burdens will be placed on competition
as a result of the proposed rule change.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange received one comment letter in opposition to the
proposed rule change from an Exchange specialist. However, the
Exchange's Committee on Floor Procedure has approved the proposed rule
change.
According to the Exchange,\6\ on October 20, 1992, the Exchange
received a comment letter from an Exchange specialist in opposition to
the proposed rule change. The commentator opposes the rule change for
several reasons. Specifically, the commentator states that the proposed
rule does not provide for the protection of customer orders; that the
proposed rule is not necessary because there is not a problem now
except for a few specialists; that the proposed rule will be subject to
abuse because of the inability to determine whether or not the crosses
are really agency crosses on an immediate basis; that the Exchange
should be encouraging more orders and less crosses; and that, as a
result of the new rule, specialists will not be able to participate,
among other things.
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\6\See Amendment No. 1, supra, note 2.
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The Exchange believes that the commentator's concerns are
misplaced. First, the proposed rule change will not interfere with
public orders in the book. Customer orders will continue to be
protected under the proposed rule, even if, through oversight, they are
not displaced. The specialist must fill a customer order at the limited
price even if an agency cross takes place at the limit price. This
should also encourage specialists to be more efficient in displaying
customer orders.
Second, the proposal will encourage more institutional trades to be
sent to the floor; whether this will result in more revenue to the
Exchange is a secondary consideration. The proposal will provide a more
attractive marketplace for institutional orders without sacrificing
traditional agency/auction principles.
Third, the potential that some firms may abuse the rule by not
having an agency order on both sides of the trade is not an argument
for not having the rule. There are literally dozens of rules in place
today which inherently cannot be surveilled on an immediate basis to
monitor compliance. If the Exchange finds that firms are abusing the
rule, it will take appropriate action.
Lastly, the proposed rule does not reduce the possibility of order
interaction on the floor. The specialist is the only one who cannot
participate in a cross if he is not displaying his market at the cross
price; this should encourage specialists to quote their true markets.
The requirement for a firm with agency orders to cross to bid or offer
at the post still remains and any other interest in the crowd can
participate. It is only the specialist who cannot, unless he is quoting
at the cross price or unless he has been previously solicited for his
help. This is not a major departure from agency auction principles and
should encourage more orders to the Exchange floor to participate in
the auction process.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such other period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying at the
Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing will also be available for
inspection and copying at the principal office of the Chicago Stock
Exchange. All submissions should refer to File No. SR-MSE-93-05 and
should be submitted by February 18, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-1813 Filed 1-27-94; 8:45 am]
BILLING CODE 8010-01-M
