[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.