[Federal Register Volume 59, Number 247 (Tuesday, December 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31674]
[[Page Unknown]]
[Federal Register: December 27, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35120; File No. SR-PSE-94-22]
Self-Regulatory Organizations; Pacific Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change Providing for the
Execution of Cross Transactions on the PSE Equities Floor
December 19, 1994.
On August 18, 1994 the Pacific Stock Exchange, Inc. (``PSE'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'')1 and Rule 19b-4
thereunder,2 a proposed rule change to facilitate the execution of
large agency cross transactions on the Exchange equities floors. On
October 13, 1994, the Exchange submitted Amendment No. 1.3
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1991).
\3\See letter from Michael Pierson, Senior Attorney, PSE, to
Sandra Sciole, Commission, dated October 10, 1994.
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The proposed rule change, as amended, was published for comment in
Securities Exchange Act Release No. 34849 (October 18, 1994), 59 FR
53695 (October 25, 1994). No comments were received on the proposal.
The proposed rule change adopts Commentary .05 to PSE Rule 5.14(b),
which governs the execution of stock cross transactions, to facilitate
the execution of large agency crosses. The proposed Commentary is
designed to permit the execution of ``clean'' agency crosses of 25,000
shares or more at or within the prevailing quotation without regard to
the priority of existing bids or offers where both the buy and sell
orders are for accounts other than that of a member or member
organization or non-member broker dealer. The proposal, however, would
allow the cross to be broken up at a price that is better than the
proposed cross price for one side or the other, but in doing so the
member must satisfy all other existing bids and offers at that price.
The Commission notes that similar rules are in place at the New
York Stock Exchange (``NYSE'')4 and at the American Stock Exchange
(``Amex'')5. The NYSE and Amex rules, like the PSE proposal,
restrict clean crosses to agency orders, of 25,000 shares or more, and
permit such crosses to be broken up only if price improvement will
result therefrom and all other bids and offers at that price are
satisfied.
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\4\See NYSE Rule 72(b) (Priority of Agency Cross Transactions).
\5\See Amex Rule 126(g), Commentary .02.
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The clean cross proposal should facilitate the ability of PSE
members to execute block agency cross transactions on the PSE by giving
such orders priority over orders at or within the prevailing quotation.
At the same time, the proposal preserves the auction market principle
of price improvement by permitting the cross transaction to be broken
up at a better price. The proposal also preserves the principle of
priority by requiring that a member who breaks up a cross by providing
a better price must first satisfy all existing market interest having
priority at that better price before trading with any part of the
cross.
The Commission recognizes that approval of the clean cross proposal
could disadvantage orders on the book, or in the trading crowd, at the
same price as the cross transaction. This is the only aspect of the
proposal that really represents a departure from existing auction
market principles. Thus, under the proposal, a clean cross could be
executed while a public investor's limit order on the book remains
unexecuted. For example, if a public customer left a limit order on the
specialist's book at 10 a.m., bidding for 500 shares of XYZ at 40, a
so-called clean cross could be executed at 10:10 at a price of 40
without satisfying the public customer order.
As previously noted in the approval of the NYSE and Amex proposal,
the Commission still believes that a preferable approach would be to
establish a means of intermarket price protection for all limit orders
in all market centers. However, with no means of intermarket price
protection for public limit order, and given Commission approval of the
NYSE's and Amex's identical clean cross proposals, as well as other
regional exchange proposals designed to minimize interference with
cross transactions, it could be unfair to preclude the PSE from
adapting to the present competitive environment by facilitating the
execution of agency block cross transactions on the Exchange. Thus, the
Commission believes that it is not unreasonable or inconsistent with
the Act for the PSE to react to competitive pressures for block
business by permitting large agency crosses to occur at or within the
bid or offer price. In this regard, the proposed rule change should
further competition among exchanges and other competing market centers
and increase opportunities for the more efficient execution of block-
sized agency cross transactions.
The Commission believes that the proposal restricts sufficiently
the circumstances in which members may execute clean cross transactions
on the Exchange. In particular, the Commission believes that the share
size threshold of 25,000 shares or more should help to ensure that the
clean cross proposal will apply primarily to large block-sized orders
where the depth of the prevailing bid or offer may be less likely to
satisfy either side of the clean cross. In addition, because the
proposal is limited to agency orders only, the proposal should assist
public customers in effecting cross transactions on the Exchange and
should not give any special advantage to members, member organizations,
and non-member broker dealers in their proprietary trading.
In summary, the Commission believes that the clean cross proposal
should allow the Exchange to compete with other exchanges for block-
sized orders more fairly while upholding the auction market principle
of price improvement. In this context, while the proposed Commentary
allows market interest of any size to break up a cross transaction, the
Commentary also requires that a member breaking up a cross must provide
a better price than the cross price to one side of the cross and he or
she must satisfy in their entirety any bids or offers that have
priority at that better price before taking any part of the cross.
For the above reasons, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange,
and, in particular, with the requirements of Sections 6(b) and 11A.\6\
In particular, the Commission believes the proposal is consistent with
the Section 6(b)(5) requirements that the rules of an exchange be
designed to promote just and equitable principles of trade, to prevent
fraudulent and manipulative acts, and, in general, to protect investors
and the public; the Section 6(b)(8) requirement that the rules of an
exchange do not impose any burden on competition not necessary or
appropriate in furtherance of the Act; and the Section 11A(a)(1)(C)(ii)
mandate for fair competition among exchange markets.
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\6\15 U.S.C. 78f(b) and 78k-1 (1988).
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
\7\ that the proposed rule change (SR-PSE-94-22) is approved.
\7\15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\17 CFR 200.30-3(a) (12) (1991).
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[FR Doc. 94-31674 Filed 12-23-94; 8:45 am]
BILLING CODE 8010-01-M
