[Federal Register Volume 59, Number 247 (Tuesday, December 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31674]


[[Page Unknown]]

[Federal Register: December 27, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35120; File No. SR-PSE-94-22]

 

Self-Regulatory Organizations; Pacific Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Providing for the 
Execution of Cross Transactions on the PSE Equities Floor

December 19, 1994.
    On August 18, 1994 the Pacific Stock Exchange, Inc. (``PSE'' 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 facilitate the execution of 
large agency cross transactions on the Exchange equities floors. On 
October 13, 1994, the Exchange submitted Amendment No. 1.3
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1991).
    \3\See letter from Michael Pierson, Senior Attorney, PSE, to 
Sandra Sciole, Commission, dated October 10, 1994.
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    The proposed rule change, as amended, was published for comment in 
Securities Exchange Act Release No. 34849 (October 18, 1994), 59 FR 
53695 (October 25, 1994). No comments were received on the proposal.
    The proposed rule change adopts Commentary .05 to PSE Rule 5.14(b), 
which governs the execution of stock cross transactions, to facilitate 
the execution of large agency crosses. The proposed Commentary is 
designed to permit the execution of ``clean'' agency crosses of 25,000 
shares or more at or within the prevailing quotation without regard to 
the priority of existing bids or offers where both the buy and sell 
orders are for accounts other than that of a member or member 
organization or non-member broker dealer. 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, but in doing so the 
member must satisfy all other existing bids and offers at that price.
    The Commission notes that similar rules are in place at the New 
York Stock Exchange (``NYSE'')4 and at the American Stock Exchange 
(``Amex'')5. The NYSE and Amex rules, like the PSE proposal, 
restrict clean crosses to agency orders, of 25,000 shares or more, and 
permit such crosses to be broken up only if price improvement will 
result therefrom and all other bids and offers at that price are 
satisfied.
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    \4\See NYSE Rule 72(b) (Priority of Agency Cross Transactions).
    \5\See Amex Rule 126(g), Commentary .02.
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    The clean cross proposal should facilitate the ability of PSE 
members to execute block agency cross transactions on the PSE 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.
    As previously noted in the approval of the NYSE and Amex proposal, 
the Commission still believes that a preferable approach would be to 
establish a means of intermarket price protection for all limit orders 
in all market centers. However, with no means of intermarket price 
protection for public limit order, and given Commission approval of the 
NYSE's and Amex's identical clean cross proposals, as well as other 
regional exchange proposals designed to minimize interference with 
cross transactions, it could be unfair to preclude the PSE 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 PSE to react to competitive pressures for block 
business by permitting large agency crosses to occur at or within the 
bid or offer price. In this regard, 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.
    The Commission 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 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, because the 
proposal is limited to agency orders only, the proposal should assist 
public customers in effecting cross transactions on the Exchange and 
should not give any special advantage to members, member organizations, 
and non-member broker dealers in their proprietary trading.
    In summary, the Commission believes that the clean cross proposal 
should allow the Exchange to compete with other exchanges for block-
sized orders more fairly while upholding the auction market principle 
of price improvement. In this context, while the proposed Commentary 
allows market interest of any size to break up a cross transaction, the 
Commentary also requires that a member breaking up a cross must provide 
a better price than the cross price to one side of the cross and he or 
she must satisfy in their entirety any bids or offers that have 
priority at that better price before taking any part of the cross.
    For the above reasons, 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 Sections 6(b) and 11A.\6\ 
In particular, the Commission believes the proposal is consistent with 
the Section 6(b)(5) requirements 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; the Section 6(b)(8) requirement that the rules of an 
exchange do not impose any burden on competition not necessary or 
appropriate in furtherance of the Act; and the Section 11A(a)(1)(C)(ii) 
mandate for fair competition among exchange markets.
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    \6\15 U.S.C. 78f(b) and 78k-1 (1988).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
\7\ that the proposed rule change (SR-PSE-94-22) is approved.

    \7\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.\8\
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    \8\17 CFR 200.30-3(a) (12) (1991).
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[FR Doc. 94-31674 Filed 12-23-94; 8:45 am]
BILLING CODE 8010-01-M