[Federal Register Volume 64, Number 24 (Friday, February 5, 1999)]
[Notices]
[Pages 5844-5846]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2736]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40998; File No. SR-CHX-98-27]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change Relating to Crossing
Orders of 25,000 Shares or More
January 29, 1999.
I. Introduction
On November 5, 1998, the Chicago Stock Exchange, Inc. (``CHX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and
Rule 19b-4 thereunder,\2\ a proposed rule change relating to crossing
orders of 25,000 shares or more.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in the Federal
Register on December 15, 1998.\3\ No comments were received on the
proposal. This order approves the proposal.
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\3\ See Exchange Act Release No. 40758 (December 8, 1998), 63 FR
69125
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II. Description of the Proposal
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.\4\ Unlike the rules of certain other
exchanges,\5\ 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).\6\ In addition, unlike some other exchanges,\7\ 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.\8\
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\4\ 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).
\5\ 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.
\6\ 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.
\7\ 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.
\8\ 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 that 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.\9\ The offer must be made at a price
which is higher than the bid by the minimum trading variation permitted
for the 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 the 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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\9\ 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 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
accord with the CHX proposal does not affect the priority of existing
orders in a specialist's book, and once the cross is executed, the
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 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 term 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
[[Page 5845]]
transactions on the CHX. The Exchange asserts that confining the
proposed size threshold to block size orders of 25,000 shares or more
will 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, under 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
\10\ 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.'' \11\ 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 broker. 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).''
\12\
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\10\ 15 U.S.C. 78k(a)(1)(G).
\11\ See Exchange Act Release No. 33391 (December 28, 1993), 59
FR 336 (January 4, 1994) (order approving SR-PSE-91-11). The PCX
changed its name in 1997 from Pacific Stock Exchange to Pacific
Exchange.
\12\ Id.
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III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act \13\ and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, with the requirements of Sections 6(b) and 11A of the
Act.\14\ Specifically, the Commission believes that the proposed rule
change does not impose any burden on competition not necessary or
appropriate in furtherance of the Act and is designed to promote just
and equitable principles of trade, to prevent fraudulent and
manipulative acts, and, in general, to protect investors and the public
interest.\15\ The Commission also believes that the proposed rule
change is consistent with Section 11A of the Act,\16\ in that it will
enable the CHX to better compete with the other exchanges markets.
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\13\ In reviewing this proposal, the Commission has considered
the proposal's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\14\ 15 U.S.C. 78f(b) and 78k-1.
\15\ 15 U.S.C. 78f(b)(5).
\16\ 15 U.S.C. 78k-1(a)(1)(C)(ii).
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The Commission believes that the proposed rule change should
enhance CHX's ability to compete for block business and could enhance
the depth and liquidity of CHX's market. That said, the Commission also
believes that limiting the proposed size threshold to block-size orders
of 25,000 shares or more should limit the effects of the rule primarily
to actively traded, liquid securities.
The Commission believes that the proposed rule change should
increase the opportunities for the efficient execution of block-sized
agency cross transactions. Specifically, the proposed rule change
should facilitate the ability of CHX members to execute block agency
transactions on the CHX by giving such orders priority over orders at
or within the prevailing quotation.
The Commission notes that the proposed rule change also preserves
the auction market principle of price improvement by prohibiting the
cross transaction from being broken up unless a member is willing to
provide price improvement to the cross price (either all or part of
such bid or offer). 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 smaller orders with time priority which are on the
book, or in the trading crowd, as the same price as the cross
transaction. The Commission, however, 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 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,
the proposal is limited to agency orders only and, therefore, it should
not give any special advantage to members, member organizations, and
non-member broker-dealers in their proprietary trading.
The Commission notes that similar rules are in place at the Amex,
NYSE, and PCX.\17\ The rules of the Amex, NYSE, and PCX, like the CHX
proposal, give priority to agency cross transactions of 25,000 shares
or more and permit such crosses to be broken up only if price
improvement will result therefrom. The Commission notes, however, that
the CHX's proposed rule is more restrictive than the rules of the Amex,
NYSE, or PCX in that it allows for an agency block-sized cross
transaction to occur without being broken up at the cross price as long
as the size of the proposed cross transaction is of a size greater than
the aggregate size of all interest communicated on the Exchange Floor
at that price at the time of the cross.
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\17\ See Amex Rule 126(g), Commentary .02; NYSE Rule
72(b)(Priority of Agency Cross Transactions); PCX Rule 5.14(b),
Commentary .05.
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Finally, the Commission believes that because the CHX proposal is
limited to crosses not involving principal transactions of the
executing broker (i.e., limited to orders in which the floor broker
acts as agent) it would not grant priority, parity or precedence to the
order of a member inconsistent with Section 11(a)(1)(G) of the Act \18\
or Exchange Act Rule 11a1-1(T)(a)(3) thereunder.\19\ For purposes of
the proposed rule change, the CHX has defined the term ``customer
order'' as an order that a broker represents in an agency capacity,
including a professional order that is not for an account associated
with the executing broker. Because the 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) of the Act.
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\18\ 15 U.S.C. 78k(a)(1)(G).
\19\ 17 C.F.R. 240.11a1-1(T)(a)(3).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\20\ that the proposed rule change (SR-CHX-98-27) is approved.
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\20\ 15 U.S.C. 78s(b)(2).
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[[Page 5846]]
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-2736 Filed 2-4-99; 8:45 am]
BILLING CODE 8010-01-M
