regulatory organizations; proposed rule changes: Chicago Stock Exchange, Inc.,
[Federal Register: December 15, 1998 (Volume 63, Number 240)]
[Notices]
[Page 69125-69127]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15de98-98]
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'') filedwith 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.
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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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.
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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.
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Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
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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\
\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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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\
\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).
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.
\8\ See CHX Art. XX, Rule 23.
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\
\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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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.
\12\ 15 U.S.C. 78f(b)(5).
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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.
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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.
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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.
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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 filedwith 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\
\13\ 17 CFR 200.30-3(a)(12).
Margaret H. McFarland, Deputy Secretary.
[FR Doc. 98-33135Filed12-14-98; 8:45 am]
BILLING CODE 8010-01-M
