[Federal Register Volume 59, Number 19 (Friday, January 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-1813]


[Federal Register: January 28, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33500; File No. SR-MSE-93-05]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Midwest Stock Exchange, Inc. Relating to Agency Crosses 
Between the Disseminated Exchange Market

January 21, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March 2, 
1993, the Midwest Stock Exchange, Inc. (``MSE,'' ``Exchange'' or 
``Chicago Stock Exchange'')\1\ filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the self-
regulatory organization. On December 10, 1993, the MSE submitted to the 
Commission Amendment No. 1 to the proposed rule change in order to 
summarize and respond to a comment letter it received in opposition to 
this proposal.\2\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\As of July 8, 1993, the Midwest Stock Exchange, Inc. 
(``MSE'') changed its name to the Chicago Stock Exchange, Inc. 
(``CHX''). See Securities Exchange Act Release Nos. 32488 (June 18, 
1993), 58 FR 34284 (June 24, 1993) (File No. SR-SME-93-13) 
(immediate effectiveness of proposed rule change to amend the MSE's 
Certificate of Incorporation and Constitution to effect a name 
change) and 32489 (June 18, 1993), 58 FR 34285 (June 24, 1993) (File 
No. SR-MSE-93-16) (immediate effectiveness of proposed rule change 
to make conforming changes to the MSE Rules).
    \2\See letter from David T. Rusoff, Foley & Lardner, to Beth A. 
Stekler, Attorney, Division of Market Regulation, SEC, dated 
December 9, 1993 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSE proposes to add an ``Interpretation and Policy'' to Article 
XX, Rule 23 of its Rules which would allow MSE floor brokers to 
``cross'' stock on the Exchange floor without the possibility of break-
up by a specialist under certain circumstances. The policy would apply 
where a broker has an order to buy and an order to sell the same stock 
at a price between the disseminated Exchange market.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of an 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. The self-regulatory organization 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 purpose of the proposed rule change is to increase the 
possibility of immediate execution of agency crosses\3\ on the Exchange 
when the cross price is between the disseminated MSE market.
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    \3\For purposes of this proposal, the Exchange has defined an 
agency cross to be a cross where neither the order to buy nor the 
order to sell is for the account of any member or member 
organization (i.e., including, but not limited to, the member or 
member organization executing the cross). Telephone conversation 
between David T. Rusoff, Foley & Lardner, and Beth A. Stekler, 
Attorney, Division of Market Regulation, SEC, on January 5, 1994.
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    At present, Exchange rules require members, or member 
organizations, with both an order to buy and an order to sell the same 
security to offer publicly such security at a price which is higher 
than the bid by the minimum variation permitted in such security 
(generally an \1/8\th) before making a transaction with himself, or 
itself. The ability of specialists, in particular, to participate in 
agency crosses, even when they are not disseminating a bid or offer at 
the cross price, greatly decreases the likelihood of immediate 
execution of the cross orders for order sending firms. The proposed 
rule change therefore is designed to give order sending firms greater 
assurances that their cross orders will be executed quickly and without 
interference.
    Because this proposal addresses only the circumstances under which 
an MSE specialist must refrain from participating in a cross 
transaction, the proposal would not excuse members from the requirement 
to bid and offer stock as set out in Rule 23. As such, the proposal 
would still permit a member in the crowd to participate at the cross 
price, or better, during the bidding and offering at the post. However, 
a specialist would not be permitted to interfere with the cross during 
the bidding and offering at a price which he is not currently 
disseminating in his quote.\4\ However, a specialist could participate 
in the cross at the cross price if he was previously sought out for 
assistance in executing any part of the cross trade.
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    \4\Conversely, this proposal would allow a specialist who has a 
disseminated bid or offer at the cross price to participate at that 
cross price, even in a size greater then the specialist's 
disseminated market. Telephone conversation between David T. Rusoff, 
Foley & Lardner, and Beth A Stekler, Attorney, Division of Market 
Regulation, SEC, on December 20, 1993.
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    Under the proposed rule, a customer order in the book could not be 
``disadvantaged'' by a cross transaction because the proposal would 
apply only to crosses at prices between the disseminated Exchange 
market. Moreover, the Exchange's existing rules of priority and 
precedence would not be affected in any way under this proposal. 
Therefore, even though a specialist would be precluded from 
participating with a cross at a price between his disseminated market, 
he would still be required to satisfy orders in this book at the cross 
price, even if those orders are not being disseminated through an 
oversight on the part of the specialist.
    Finally, the proposed rule would apply to only floor-brokered 
orders where neither order is for the account of a member or member 
organization.\5\ The proposed rule would apply to all agency crosses 
regardless of size.
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    \5\See supra, note 3.
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b)(5) of the 
Act, in that it is designed to promote just and equitable principles of 
trade, to remove impediments to 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.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that no burdens will be placed on competition 
as a result of the proposed rule change.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange received one comment letter in opposition to the 
proposed rule change from an Exchange specialist. However, the 
Exchange's Committee on Floor Procedure has approved the proposed rule 
change.
    According to the Exchange,\6\ on October 20, 1992, the Exchange 
received a comment letter from an Exchange specialist in opposition to 
the proposed rule change. The commentator opposes the rule change for 
several reasons. Specifically, the commentator states that the proposed 
rule does not provide for the protection of customer orders; that the 
proposed rule is not necessary because there is not a problem now 
except for a few specialists; that the proposed rule will be subject to 
abuse because of the inability to determine whether or not the crosses 
are really agency crosses on an immediate basis; that the Exchange 
should be encouraging more orders and less crosses; and that, as a 
result of the new rule, specialists will not be able to participate, 
among other things.
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    \6\See Amendment No. 1, supra, note 2.
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    The Exchange believes that the commentator's concerns are 
misplaced. First, the proposed rule change will not interfere with 
public orders in the book. Customer orders will continue to be 
protected under the proposed rule, even if, through oversight, they are 
not displaced. The specialist must fill a customer order at the limited 
price even if an agency cross takes place at the limit price. This 
should also encourage specialists to be more efficient in displaying 
customer orders.
    Second, the proposal will encourage more institutional trades to be 
sent to the floor; whether this will result in more revenue to the 
Exchange is a secondary consideration. The proposal will provide a more 
attractive marketplace for institutional orders without sacrificing 
traditional agency/auction principles.
    Third, the potential that some firms may abuse the rule by not 
having an agency order on both sides of the trade is not an argument 
for not having the rule. There are literally dozens of rules in place 
today which inherently cannot be surveilled on an immediate basis to 
monitor compliance. If the Exchange finds that firms are abusing the 
rule, it will take appropriate action.
    Lastly, the proposed rule does not reduce the possibility of order 
interaction on the floor. The specialist is the only one who cannot 
participate in a cross if he is not displaying his market at the cross 
price; this should encourage specialists to quote their true markets. 
The requirement for a firm with agency orders to cross to bid or offer 
at the post still remains and any other interest in the crowd can 
participate. It is only the specialist who cannot, unless he is quoting 
at the cross price or unless he has been previously solicited for his 
help. This is not a major departure from agency auction principles and 
should encourage more orders to the Exchange floor to participate in 
the auction process.

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 other 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. Persons making written submissions 
should file six copies thereof with the Secretary Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 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 Section, 450 Fifth Street, NW., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the Chicago Stock 
Exchange. All submissions should refer to File No. SR-MSE-93-05 and 
should be submitted by February 18, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-1813 Filed 1-27-94; 8:45 am]
BILLING CODE 8010-01-M