[Federal Register Volume 63, Number 240 (Tuesday, December 15, 1998)]
[Notices]
[Pages 69125-69127]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33135]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40758; File No. SR-CHX-98-27]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Stock Exchange, Inc., Relating To Crossing Orders
of 25,000 Shares or More
December 8, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on November 5, 1998, the Chicago Stock Exchange,
Inc. (``CHX'' or ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
by CHX. 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\ 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 is proposing to add Interpretation and Policy .02 to Article
XX, Rule 23 of the Exchange's rules relating to the execution of
certain cross transactions involving 25,000 shares or more on the
Exchange's floor. The text of the proposed rule change is available at
the Office of the Secretary, CHX and at the Commission.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, CHX included statements
concerning the purpose of and 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. 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 Change
1. Purpose
The Exchange's general auction market procedures are codified in
CHX Article XX, Rule 16, which provides for the manner in which bids
and offers at the same price will be sequenced for execution. A member
who makes the first bid or offer at a particular price has ``priority''
at that price, which means that the member is the first one in the
market to be entitled to receive an execution at that price. If no
member can claim priority, all members who are bidding or offering at a
particular price are deemed to be on ``parity'' with each other, or
equivalent in status.\3\
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\3\ Members are on parity with each other when two or more bids
or offers are announced simultaneously, or after a trade takes place
leaving several bids or offers unfilled at the same price as the
executed trade. See CHX Art. XX, Rule 16 (b) and (c).
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[[Page 69126]]
Unlike the rules of certain other exchanges,\4\ however, the CHX
does not currently permit bids and offers that have parity to obtain
precedence based on size (a so-called ``size-out'' rule).\5\ In
addition, unlike some other exchanges,\6\ the CHX does not currently
have a ``clean cross'' rule (as an exception to the normal priority
rules) that would permit a member to cross a large block of stock,
without the cross being broken up, by permitting the cross to obtain
priority over all other existing bids and offers at the same price,
regardless of the size of such bids or offers.\7\
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\4\ See New York Stock Exchange (``NYSE'') Rule 72 and similar
Philadelphia Stock Exchange and Boston Stock Exchange rules. The
American Stock Exchange (``Amex'') has a modified version of a
``size out'' rule for crosses of 25,000 shares or more. See Amex
Rule 126(g), commentary .01 and .02.
\5\ Under a typical size-out rule, the priority of existing bids
and offers are first removed by means of a sale so that all bids and
offers are on parity. Then, a person desiring to execute a cross can
usually do so by claiming precedence based on size, so long as the
size of the cross is greater than any other single bid or offer at
that price.
\6\ See, e.g., NYSE Rule 72(g) which gives priority to an agency
cross transaction of 25,000 shares or more that is executed at or
within the prevailing quotation, without regard to the size or price
of existing bids or offers on the floor. Other members can typically
interact with the cross only by bettering one side of the cross, and
even then, can only do so after satisfying all other existing bids
or offers at that price. The Pacific Exchange, Inc. (``PCX'') and
Amex have similar crossing rules.
\7\ While the CHX does have a crossing rule, Article XX, Rule
23, this rule only permits crosses between (and not at) the CHX
disseminated market. Thus, under current rules, assuming a
specialist has properly reflected all limit orders from his book in
his quote, the crossing rule does not have any effect on the
Exchange's general priority, parity and precedence rules because all
crosses must be at a better price than the disseminated market.
Therefore, they are entitled to priority because of price (and not
because of a special priority rule giving certain crosses priority
over other bids and offers).
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The purpose of the proposed rule filing is to add new
interpretation and policy .02 to Article XX, Rule 23, to allow a member
or member organization who has an order to buy and an order to sell
25,000 shares or more of the same security to cross those orders at a
price that is at or within the prevailing quotation, without the
transaction being broken up at the cross price so long as (i) the size
of the proposed cross transaction is of a size that is greater than the
aggregate size of all interest communicated on the Exchange floor at
that price at the time of the proposed cross, and (ii) neither side of
the cross is for the account of the executing member or member
organization.
As is the case for cross transactions that are permitted under
existing CHX rules, prior to effecting the cross under the new
proposal, the member will be required to make a public bid and offer on
behalf of both sides of the cross.\8\ The offer must be made at a price
which is higher than the bid by the minimum trading variation permitted
for such security. Under the proposal, another member may trade with
either the bid or offer side of the cross transaction only to provide a
price which is better than the cross price as to all or part of such
bid or offer. A member who is providing a better price to one side of
the cross transaction must trade with all other market interest having
priority at that price before trading with any part of the cross
transaction.
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\8\ See CHX Art. XX, Rule 23.
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Because the proposal provides that the bid or offer of the member
desiring to execute the cross would be entitled to priority at such
price (over pre-existing bids and offers at that price) only if the
size of the cross is greater than the aggregate size of all interest
communicated on the Exchange floor (which includes the specialist's bid
or offer--including any limit order reflected in such quote--and any
communicated interest of floor brokers or market makers standing in the
crowd), the proposed rule is more akin to a size-out rule rather than a
special priority rule.
The difference between the CHX proposal and the size-out rules
contained on other exchanges is that the priority of earlier bids and
offers will not have to be removed, by means of a sale, before
effecting the cross. In addition, a cross transaction effected in the
CHX proposal does not affect the priority of existing orders in a
specialist's book, and once the cross is executed, such priority (based
on time rather than size) shall remain as it was before the execution
of the cross transaction. In this sense, the proposal does have some
attributes of a special priority rule. However, unlike the special
priority rule afforded certain crosses on other exchanges, which are
reported to the tape as ``stopped stock,'' cross transactions effected
under the proposed rule will be reported to the tape without a ``tape
designator.''
The CHX proposal limits the types of orders eligible to be crossed.
Specifically, as stated above, no part of the cross can include an
order for the account of the executing member or member organization.
Under the proposal, only customer orders of a floor broker (i.e.,
orders in which the floor broker acts as agent) can be included in the
cross. For purposes of this proposal, the terms customer order includes
professional orders not for the account of the executing member (i.e.,
orders for the accounts of broker-dealers and other members or member
organizations communicated from off the floor).
The proposal is intended to facilitate the execution of certain
cross transactions on the CHX. The Exchange asserts that confining the
proposed size threshold to block size orders of 25,000 shares or more
would limit the effects of the rule primarily to actively traded,
liquid securities.
The CHX further believes that the proposal, as drafted, furthers
the important auction market principle of price improvement by allowing
another member, certain conditions, to trade with either the bid or
offer side of the cross transaction to provide a price that is better
than the proposed cross price.
Finally, the Exchange believes that limiting the proposal to
crosses not involving principal transactions of the executing broker
(i.e., limiting the proposal to orders in which the floor broker is
acting as agent), is consistent with Section 11(a)(1)(G) of the Act \9\
as well as portions of other crossing rules at other exchanges. For
example, in approving a crossing rule for the PCX, the Commission
stated that it ``believes that the [PCX] proposal would not grant
priority, parity or precedence to the order of a member in a manner
inconsistent with Section 11(a)(1)(G) of the Act or Rule 11a1-
1(T)(a)(3) thereunder.'' \10\ The PCX proposal defined customer to
include any order that the broker represents in an agency capacity,
including a professional order that is not for an account associated
with the executing brokers. The Commission concluded that because
``this definition of customer order excludes, and thus does not grant
priority to, an order for an account over which the broker or an
associated person of the broker exercises investment discretion, the
Commission is satisfied that the proposed rule change complies with
Section 11(a).'' \11\
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\9\ 15 U.S.C. 78k(a)(1)(G).
\10\ See Exchange Act Release No. 33391 (December 28, 1993), 59
FR 336 (January 4, 1994) (order approving SR-PSE-91-11).
\11\ Id.
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2. Statutory Basis
The CHX believes that the proposed rule change is consistent with
Section 6(b)(5) of the Act \12\ in that it is designed to promote just
and equitable principles or trade, to remove impediments 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.
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\12\ 15 U.S.C. 78f(b)(5).
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[[Page 69127]]
B. Self-Regulatory Organization's Statement on Burden on Competition
CHX does not believe that the proposed rule change will impose any
inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
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 longer 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, including whether the proposal is
consistent with the Act. Persons making written submissions should file
six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 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 Room. Copies of such filing will also be available for
inspection and copying at the principal office of the CHX.
All submissions should refer to File No. SR-CHX-98-27 and should be
submitted by January 5, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-33135 Filed 12-14-98; 8:45 am]
BILLING CODE 8010-01-M
