[Federal Register Volume 59, Number 244 (Wednesday, December 21, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: X94-11221]


[[Page Unknown]]

[Federal Register: December 21, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35103; File No. SR-NYSE-94-10]

 

Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Relating to Amendments 
to Rule 127 (Block Positioning) and Rule 72(b) (``Clean'' Agency 
Crosses)

December 15, 1994.

I. Introduction

    On March 17, 1994, the New York Stock Exchange, Inc. (``NYSE'' 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 amend Exchange Rule 127 on 
Block Positioning and Rule 72(b) on ``clean'' agency crosses.
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    \1\15 U.S.c. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1993).
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 34302( July 1, 1994), 59 FR 35161 (July 8, 
1994). No comments were received on the proposal.

II. Description

    NYSE Rule 127 outlines the current method for executing block cross 
transactions at a price that is outside of the NYSE best bid or offer. 
Under Rule 127, a member must inform the specialist of his intention to 
cross block orders at a specific price (the ``clean-up'' price) and 
determine the extent of the interest the specialist has in 
participating in the transaction.\3\ The member then announces the 
clean-up price to other members in the trading crowd (``Crowd'') and 
files at the clean-up price all public orders limited to the clean-up 
price or better.\4\ The member then crosses the remaining shares at the 
clean-up price.\5\
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    \3\Rule 127 states that there should be no intervening trades by 
the member between the time the member informs the specialist of his 
intention to cross block orders and the trade or trades to clean-up 
the block, except that a member may trade with the exposed bid or 
offer if the clean-up price is one-eighth of a point outside the 
current quotation and the member is holding only agency orders on 
both sides of the market.
    \4\A limit order to buy or sell stock for a particular price is 
said to be ``limited to'' the specified price. Therefore, a limit 
order ``limited to the clean up-price'' is an order to buy or sell 
stock for the same price at which the block transaction is proposed 
to be executed. For example, if the current quote is 20 to 20\1/8\ 
for a stock traded in \1/8\ minimum variations and a member 
announces a clean-up price of 19\5/8\, he must fill at the clean-up 
price 19\5/8\ all public orders to buy limited to 20, 19\7/8\, 19\3/
4\, and 19\5/8\. This allows these public limit orders to receive 
the benefit of the clean-up price.
    \5\Technically, the member makes a bid and offer according to 
NYSE Rule 76. See infra note 6.
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    If the member determines, however, that the amount of stock needed 
to trade with other public limit orders excessively interferes with the 
proposed block cross, the member may adjust the clean-up price or may 
elect to announce the original clean-up price again and inform the 
Crowd that it will not be given stock at the clean-up price. After such 
an announcement is made, the member proceeds to make a bid and offer 
for the full amount of the block cross pursuant to NYSE Rule 76.\6\ 
After filling any market interest at the bid, the member crosses the 
block orders for the remaining shares at the clean-up price.
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    \6\Under NYSE Rule 76, the member makes an offer higher than the 
clean-up price by the minimum variation permitted in such security. 
For example, if the clean-up price is 19\5/8\, the member would make 
an offer at 19\3/4\.
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    If the block cross represents agency orders on both sides, a member 
that does not fill at the clean-up price public orders limited to the 
clean-up price or better may exercise its right to precedence at the 
clean-up price based on size.\7\ Rule 127 currently provides that, 
regardless of precedence at the clean-up price, the member must fill 
public orders limited to the clean-up price that are on the 
specialist's book, up to a minimum amount of 1000 shares or 5% of the 
total amount crossed at the clean-up price, whichever is greater.\8\ In 
addition, if all or any portion of the block will have the effect of 
establishing or increasing the member organization's position, the 
member representing the block orders must fill at the clean-up price 
the public orders limited to the clean-up price or better before any 
amount may be retained for the member organization's account.
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    \7\If a member has precedence at the clean-up price, it is not 
required to execute other pre-existing orders limited to the clean-
up price. See NYSE Rule 72(c), which provides that, when no bid is 
entitled to time priority, all bids for a number of shares of stock 
equaling or exceeding the number of shares of stock in the offer are 
on parity and entitled to precedence over bids for less than the 
number of shares in the offer, except that if it is possible to 
determine the order of time in which the bids with precedence were 
made, such bids will be filled in that order.
    \8\Because this stock is assigned rather than acquired as the 
result of priority, precedence based on size, or a match in a parity 
situation, the specialist does not follow the normal policy of 
assigning executions to orders in the priority of receipt, but 
rather assigns 100 shares to each order on the book.
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    Rule 127 also provides that if the member fails to consult with the 
specialist prior to announcing the block cross to the Crowd, he is 
responsible for filling the reasonable needs of the specialist at the 
clean-up price. If, however, the member determined that too much stock 
would be lost to the market and announced that public orders would not 
receive stock at the clean-up price as described above, the member is 
not required to give the specialist stock at the clean-up price. If 
there is a disagreement between the specialist and the member 
representing the block orders as to the extent of the specialist's 
needs, the rule suggests the use of a Floor Official to resolve the 
differences.
    The NYSE proposes to change the procedure for crossing block orders 
outside the current quotation in several respects. The proposal alters 
a member's obligations to fill public orders at the clean-up price and 
removes the block positioner's responsibility for maintaining the 
aftermarket when the block positioner has not satisfied the reasonable 
needs of the specialist. Finally, the rule change requires 
documentation when an agency block cross outside the prevailing 
quotation is executed and public orders limited to the clean-up price 
or better are not executed at the clean-up price.\9\
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    \9\The rule change also clarifies the rule for block 
transactions in which all or a part of the block is for a member or 
member organization's own account. The rule change states that if 
all or any portion of a block that a member is representing will 
establish or increase the member's position, the member must fill at 
the clean-up price public orders limited to the clean-up price or 
better before any amount may be retained for the member 
organization's account. However, if the member is covering a short 
position or liquidating a long position, it is not required to fill 
at the clean-up price orders limited to the clean-up price or 
better.
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    The rule change would eliminate the requirement that a member 
representing an agency block cross with size precedence at the clean-up 
price must fill public orders limited to the clean-up price that are on 
the specialist's book, up to a minimum amount of 1000 shares or 5% of 
the total amount crossed at the clean-up price, whichever is greater. 
Instead, when a member determines that the amount of stock that would 
be lost to the market is excessive and announces to the Crowd that 
stock will not be given at the clean-up price, the block transaction is 
entitled to priority at the clean-up price after the member has 
followed the procedures of NYSE Rule 76 and filled orders at the bid.
    The Exchange states that the deletion of the current requirement is 
appropriate to conform the agency cross principles of Rule 127 with the 
agency cross principles of Rule 72(b), the Exchange's rule for agency 
block crosses at or within the best NYSE quotation.\10\ Under NYSE Rule 
72(b), public orders may participate in proposed cross transactions by 
providing price improvement to one side of the cross, but cannot trade 
with or ``break up'' crossed orders at the clean-up (cross) price.
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    \10\NYSE Rule 72(b) states that the member's bid or offer is 
entitled to priority at the cross price, irrespective of pre-
existing bids or offers at the cross price. See also Securities 
Exchange Act Release No. 31343 (October 21, 1992), 57 FR 48645 
(October 27, 1992) (order approving amendments to NYSE Rule 72).
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    In addition, the rule change removes the reference to the block 
positioner's responsibility for maintaining the aftermarket when the 
block positioner has not satisfied the reasonable needs of the 
specialist. The Exchange believes that it is appropriate to place 
responsibility for the aftermarket on the specialist rather than the 
block positioner because the specialist is otherwise responsible under 
NYSE Rule 104 for the maintenance of a fair and orderly market. The 
rule change continues to state that the member should be prepared to 
fill the needs of the specialist, and that if the specialist and the 
member representing the block orders disagree as to the extent of the 
needs of the specialist, they should consult with a Floor Official. The 
rule change adds that, as provided in NYSE Rule 92, specialists may not 
retain any stock for their own accounts obtained at a price at which 
they hold executable, but unfilled, orders.
    Finally, the rule change adds in the Supplementary Material to Rule 
127 a requirement that, if a member represents only agency orders on 
both sides and does not fill public orders limited to the clean-up 
price or better at the clean-up price, the member must complete any 
documentation of the trade that the Exchange may require. The rule 
change also amends NYSE Rule 72(b) to include the same documentation 
requirements for agency crosses.

III. Discussion

    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 Section 6(b).\11\ In particular, 
the Commission believes the proposal is consistent with Section 
6(b)(5), which requires 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 interest.
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    \11\15 U.S.C. 78f(b) (1988).
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    Specifically, the Commission believes that the rule change to 
remove the requirement that members must fill public orders limited to 
the clean-up price, up to a minimum amount of 1000 shares or 5% of the 
total amount crossed at the clean-up price (whichever is greater), will 
not significantly impact the execution of public customer orders. 
While, in most circumstances, the Commission would be concerned about 
changes to limit order priority, the 1,000 shares or 5% requirement 
provides scant protection to limit orders at the clean-up price. It is 
reasonable for the NYSE to remove this narrow benefit to limit orders 
in order to improve the execution of agency block crosses.\12\ 
Moreover, the requirement that is being removed was imposed only on 
members representing agency orders on both sides. Its elimination, 
therefore, should assist public customers in effecting cross 
transactions on the NYSE, but should not give any special advantage to 
members of the Exchange in their proprietary trading. In addition, Rule 
127 continues to require that there be an opportunity for other market 
interest to provide a better price to one side of the cross through the 
procedures contain in NYSE Rule 76.\13\
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    \12\Execution of limit orders at prices better than the clean-up 
price will not be affected by this proposal.
    \13\See supra note 6.

    The Commission notes that the removal of the requirement will 
result in similar treatment of block crosses inside the best bid and 
offer under NYSE Rule 72(b) (the ``clean cross rule'') and outside the 
best quote under NYSE Rule 127.\14\ The clean cross rule allows 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 and offers at that price. The clean cross rule, 
however, ensures that other members may trade with either the bid or 
offer side of the cross to provide a price that is better than the 
proposed cross price. Rule 127 will provide similar opportunities for 
price improvement to agency block crosses executed outside the best 
NYSE quote.
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    \14\See Securities Exchange Act Release No. 31343 (October 21, 
1992), 57 FR 48645 (October 27, 1992) (order approving clean cross 
rule.)
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    The Commission also believes that relieving members who represent 
block crosses of the obligation to be responsible for the aftermarket 
is consistent with the NYSE's rules that place such burdens upon 
specialists. Rule 127 continues to require that members provide for the 
reasonable needs of the specialists when effecting block crosses, which 
is intended to ensure that specialists are able to meet their 
obligation to maintain fair and orderly markets under Exchange Rule 
104. Furthermore, NYSE Rule 127 provides that if there is a 
disagreement as to the amount of stock the specialist needs to secure 
an orderly aftermarket, a Floor Official should be consulted. The 
Commission therefore believes that Rule 127, as amended, should 
continue to help ensure that an orderly aftermarket will be maintained 
after executions of block crosses.
    Finally, the Commission believes it is reasonable for the Exchange 
to require certain documentation when a member representing agency 
orders on both sides does not fill at the clean-up price public orders 
limited to the clean-up price or better. When a member does not offer 
to give public orders the benefit of the cross price, the Exchange will 
be able to use the required documentation to monitor the cross 
transaction and ensure that the transaction was conducted in a fair and 
orderly manner.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-NYSE-94-10) is approved.


    \15\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.\16\
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    \16\17 CFR 200.30-3(a)(12) 1993).
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Margaret H. McFarland,
Deputy Secretary.