[Federal Register Volume 59, Number 101 (Thursday, May 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12823]
[[Page Unknown]]
[Federal Register: May 26, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34089; File No. SR-Amex-92-41]
Self-Regulatory Organizations; American Stock Exchange, Inc.;
Order Approving Proposed Rule Change and Amendment No. 1 to Proposed
Rule Change Relating to Priority of Agency Orders to Cross Blocks of
25,000 Shares or More Under Rule 126(g), Commentary .01 and .02.
May 19, 1994.
I. Introduction
On November 23, 1992, the American Stock Exchange, Inc. (``Amex''
or ``Exchange'') submitted to the Securities and Exchange Commission
(``Commission'' or ``SEC''), 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 amend Amex Rule 126(g)
relating to the priority and precedence of bids and offers. The
proposed rule specifies that agency block cross transactions,\3\ where
both buy and sell orders are for accounts other than that of a member
or member organization, can be effected without interference at the
proposed cross price. 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. The proposed rule change is known as the
``clean cross'' proposal. On March 30, 1994, the Exchange submitted to
the Commission Amendment No. 1 to the proposed rule change in order to
increase the minimum size of agency crosses that would be entitled to
priority under the proposal from 10,000 to 25,000 shares.\4\
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1991).
\3\In a cross transaction, a member who has an order to buy and
an order to sell an equivalent amount of the same stock wishes to
execute the orders against each other. Because the member already
has both sides of the trade, the member does not wish to interact
with other market interest. The member, however, must comply with
the provisions of Amex Rule 151 and make a public bid and offer on
behalf of both sides of the cross before effecting the transaction.
The offer must be made at a price which is higher than the bid by
the minimum fractional change permitted in the security. See Amex
Rule 127.
\4\See letter from Geraldine M. Brindisi, Corporate Secretary,
Amex, to Diana Luka-Hopson, Branch Chief, Division of Market
Regulation, SEC, dated March 28, 1994.
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 33835 (March 30, 1994), 59 FR 16247 (April 6,
1994). The Commission received no comment letters. This order approves
the proposed rule change, including Amendment No. 1.
II. Background
The Exchange's auction market procedures are codified in Amex Rule
126, 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 entitled to
receive an execution at that price.\5\ 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.\6\
When members are on parity, a member with orders to cross blocks of
25,000 shares or more may claim ``precedence based on size'' and
thereby be entitled to the next execution at that price.\7\
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\5\See Amex Rule 126(e)(1).
\6\See Amex Rule 126(e)(2)-(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.
\7\See Amex Rule 126(g), Commentary .01.
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Currently, members attempting to effect a ``cross'' transaction may
be required to yield either some or all of one side of their cross in
accordance with these rules. More specifically, a cross transaction may
be ``broken up'' (i.e., participated in by another member) if that
other member trades with either the bid or the offer side of the
transaction. The Amex states that the proposed amendments to Rule 126
would facilitate the ability of members to execute certain types of
cross transactions on the Exchange at the cross price, while still
providing the opportunity in the auction market for another member to
offer price improvement to the buyer or seller, as the case may be.
III. Description of the Proposal
The Amex proposes to amend its priority rules to allow a member who
has an order to buy and an order to sell 25,000 shares or more of the
same security,\8\ where neither order is for the account of a member or
a member organization, to cross those orders at a price that is at or
within the prevailing quotation without being broken up at the cross
price, irrespective of pre-existing bids and offers at that price.\9\
The proposal will allow another member 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, but the other member could not trade
with the cross bid or offer at a price which is the same as the cross
price. Moreover, the proposal will require that the 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.\10\
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\8\Amendment No. 1, supra note 4, increased the minimum size of
a ``clean cross'' to 25,000 shares.
\9\The Amex will continue to require that the member follow the
crossing procedures of Amex Rule 151 and make a public bid and offer
on behalf of both sides of the cross. See supra, note 3. Unlike
existing block cross procedures under Rule 126(g), Commentary .01,
See infra note 11, orders to be crossed under proposed Rule 126(g),
Commentary .02 will not be required to be on parity with other
orders on the floor; that is it will not be required that the
priority of earlier bids and offers first be removed, by means of a
sale, before effecting the cross.
\10\The proposal also will require that transactions effected at
the cross price in reliance on Commentary .02 be printed as
``stopped stock.''
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To avoid conflict with the Amex's proposed clean cross rule, as
discussed above, Commentary .01 to Rule 126(g) will be amended so as to
afford size precedence to orders to cross 25,000 shares or more only
when members or member organizations are involved as principal on one
or both sides of the cross. In addition, the amendments to Commentary
.01 will clarify that such orders to cross are entitled to precedence
only when they are on parity with other orders on the Floor (i.e., both
sides of the cross must be represented at the specialist's post when a
sale clearing the floor takes place).\11\
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\11\In this respect, size precedence differs from priority. See
supra note 9.
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The Amex states that the proposal is intended to facilitate the
execution of agency cross transactions on the Exchange. According to
the Amex, confining the proposed size priority threshold to block size
orders of 25,000 shares or more will limit the effects of the rule
primarily to actively traded, liquid securities. In addition, the
Exchange states that the proposal furthers the important auction market
principle of price improvement by allowing another member to trade with
either the bid or offer side of the cross to provide a price that is
better than the proposed cross price. The Amex also suggests that the
proposal preserves the auction market principle of priority by
requiring that a member who wants to break up a cross by providing a
better price must first satisfy all other market interest having
priority at that better price before trading with any part of the cross
transaction.
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act in general and furthers the objective(s)
of Section 6(b)(5) in particular in that it is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, and, in general, to protect investors and the public
interest.
IV. Discussion
The Amex clean cross proposal is designed to facilitate the
execution of cross transactions on the Exchange. As discussed below,
due to the Amex's current priority rules, some Amex members have
developed the practice of transporting cross trades to the regional
exchanges for execution, avoiding exposure to the Amex's active trading
crowd and to limit orders on the Amex's specialists' books. The clean
cross proposal, in contrast, should encourage Amex members to execute
their cross transactions on the Amex because the proposal will allow a
member who has a customer order to buy and a customer 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, irrespective of
pre-existing bids or offers at that price. The proposal will allow
another member to trade with either the bid or offer side of the cross
to provide a price that is better than the proposed cross price, but
the other member could not trade with the cross bid or offer at a price
which is the same as the cross price. Moreover, the proposal will
uphold traditional auction market principles of priority and price
improvement because it will require that the member who is providing a
better price to one side of the cross must trade with all other market
interest having priority at that price before trading with any part of
the cross.
The Commission recognizes that the Amex's clean cross proposal was
prompted by the competition that exists between the Amex and the
regional exchanges for order flow and, in particular, for block
business. The Commission also recognizes that the Amex's current
priority rules may restrict the ability of Amex members to execute
agency block cross transactions on the Exchange. Under the current
rules, a member who tries to execute a block-sized agency cross on the
Amex faces the possibility that another member will break up the cross
at the cross price. As a result, the member may take block-sized orders
in Amex-listed securities to a regional stock exchange for execution.
The relatively smaller number of limit orders on the books of the
regional stock exchange specialists and the virtual absence of a
trading crowd at the regional exchanges helps to ensure that member
firms will be able to execute their cross transactions on the regional
exchanges with little or no interference. Indeed, the regional
exchanges compete aggressively with the Amex for block
transactions.\12\ In addition, blocks go to the regional exchanges
because of the low probability that a block will be broken up on the
regional exchange.
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\12\See infra, note 15.
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The clean cross proposal should facilitate the ability of Amex
members to execute block agency cross transactions on the Amex 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.
The Commission recognizes that the Amex proposal may not be the
ideal means to address the current situation, in which a block
transaction can be effected on one of the regional stock exchanges or
in the third market and completely avoid the Amex's limit order book. A
preferable approach would be to establish a means of intermarket price
protection for all limit orders in all market centers.\13\ However,
with no means of intermarket price protection for public limit order,
and given Commission approval of the NYSE's identical clean cross
proposal,\14\ as well as certain regional exchange proposals designed
to minimize interference with cross transactions,\15\ it could be
unfair to preclude the Amex 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 Amex to react to
competitive pressures for block business by permitting large agency
crosses to occur at or within the bid or offer price. 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.
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\13\The Commission originally attempted to address the
underlying issues of limit order protection and competition among
the exchanges through an integrated national market system rule.
Specifically, the Commission proposed Rule 11Ac1-3 under the Act in
1979 to require that all limit orders that are collected in a
particular market center receive intermarket price protection
against executions at inferior prices. See Securities Exchange Act
Release No. 15770 (April 26, 1979), 44 FR 26692 (addressing the
practice of transporting block orders from one market to another to
avoid limit orders in the former market). Due to the lack of
interest from the relevant markets and potential difficulties in
implementing a system for intermarket price protection, the
Commission withdrew proposed Rule 11Ac1-3. See Securities Exchange
Act Release No. 31344 (October 21, 1992), 57 FR 48581 (October 27,
1992).
\14\See Securities Exchange Act Release No. 31343 (October 21,
1992), 57 FR 48645 (October 27, 1992) (File No. SR-NYSE-90-39)
(``NYSE Clean Cross Order'').
\15\See Securities Exchange Act Release Nos. 33708 (March 3,
1994), 59 FR 11339 (March 10, 1994) (File No. SR-MSE-93-05); 33391
(December 28, 1993), 59 FR 336 (January 4, 1994) (File No. SR-PSE-
91-11); and 27205 (August 31, 1989), 54 FR 37180 (September 7, 1989)
(File No. SR-Phlx-89-17).
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As described above, members who do not believe that they can
execute their block-sized agency orders on the Amex currently take
their orders to the regional stock exchanges, completely avoiding
exposure to limit orders on the Amex specialist's book. The Commission
believes that approval of the proposal will not result in incremental
harm to public customers. Assume, for example, that the market in XYZ
is quoted 20\1/4\ bid, 20\3/8\ offer, 100,000 shares by 100,000 shares.
Investor A has a limit buy order on the book at 20\1/4\ for 1,000
shares of XYZ. In today's environment, a member intending to effect a
100,000 share agency cross transaction at a price of 20\1/4\ could go
to another market to execute the cross, thereby avoiding exposure to
Investor A's limit buy order of 20\1/4\. As a result of the proposed
rule change, the member would, to comply with Rule 151, bid 20\1/4\ for
100,000 shares and offer 100,000 shares at 20\3/8\ on the Amex floor.
The member's 100,000 share clean cross of 20\1/4\ would have priority,
and the cross could not be broken up at that price. Although Investor
A's limit buy order would not be executed, this is the same result as
if the block was done on another market under the Amex's current rules.
The commission also 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 larger
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 non-member orders only, the proposal
should assist public customers in effecting cross transactions on the
Amex and should not give any special advantage to members and member
organizations in their proprietary trading.
Finally, the Commission finds that the proposed amendments to
Commentary .01 will eliminate potential confusion by specifying that
the Amex's existing size precedence rule does not apply to those agency
crosses of 25,000 shares which can be executed pursuant to Commentary
.02. The Commission also has concluded that the Amex proposal will
clarify the procedures for claiming precedence based on size, and
should help to ensure that bids or offers with priority are not
disadvantaged.
V. Conclusion
For the above reasons, the Commission believes that the proposed
rule change, as amended, is not inconsistent with Sections 6(b)(5),
6(b)(8) and 11A(a)(1)(C)(ii) of the Act.\16\
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\16\15 U.S.C. 78f and 78k-1 (1988).
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It therefore is ordered, Pursuant to Section 19(b)(2) of the
Act\17\ that the proposed rule change (SR-Amex-92-41), including
Amendment No. 1, is approved.
\17\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.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-12823 Filed 5-25-94; 8:45 am]
BILLING CODE 8010-01-M
