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

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