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

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