# Self-Regulatory Organizations; Pacific Stock Exchange, Inc.; Order Approving Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval to Amendments No. 1 and No. 2 to Proposed Rule Change Relating to Method for Execution of Cross Transactions > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A94-46 ## Record - **Collection:** Federal Register - **Document type:** Notice - **Published:** January 4, 1994 - **Citation:** 59 FR 336 ## Text SECURITIES AND EXCHANGE COMMISSION [Release No. 34-33391; File No. SR-PSE-91-11] Self-Regulatory Organizations; Pacific Stock Exchange, Inc.; Order Approving Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval to Amendments No. 1 and No. 2 to Proposed Rule Change Relating to Method for Execution of Cross Transactions December 28, 1993. I. Introduction On August 26, 1991, 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 relating to the method for the execution of cross transactions on the PSE. On June 7, 1993, the PSE submitted Amendment No. 1 to the proposed rule change in order to clarify certain terms used in the original filing.\3\ On August 18, 1993, the PSE submitted Amendment No. 2 to the proposed rule change in order to clarify its interpretation of certain provisions regarding specialist participation in cross transactions.\4\ --------------------------------------------------------------------------- \1\15 U.S.C. 78s(b)(1) (1988). \2\17 CFR 240.19b-4 (1991). \3\See letter from Kenneth, J. Marcus, Director, Equity Surveillance/Compliance, PSE, to Diana Luka-Hopson, Branch Chief, Division of Market Regulation, SEC, dated June 3, 1993 (``Amendment No. 1''). \4\See letter from Kenneth J. Marcus, Director, Equity Surveillance/Compliance, PSE, to Beth Stekler, Attorney, Division of Market Regulation, SEC, dated August 9, 1993 (``Amendment No. 2''). --------------------------------------------------------------------------- The proposed rule change was published for comment in Securities Exchange Act Release No. 29712 (September 20, 1991), 56 FR 49217 (September 27, 1991). No comments were received on the proposal. This order approves the proposed rule change, including both amendments on an accelerated basis. II. Description of the Proposal Exchange Rule 5.14(b) outlines the traditional method for the execution of cross transactions on the PSE.\5\ Under that rule, a member effecting a cross transaction must first assure that all existing bids or offers by the specialists, in the books or at the posts, at or better than the cross price, are filled at their limits.\6\ Thereafter the member must publicly announce both sides of the cross; the member's offer must be higher than his or her bid by the minimum trading differential permitted for that security.\7\ Rule 5.14(b) then allows the member to execute the cross transaction at his or her bid or offer. Under this method, however, another member can ``break up'' the cross by trading with either the bid or the offer side of the transaction when it is presented to the crowd. --------------------------------------------------------------------------- \5\In a cross transaction, a member who holds an order to buy and an order to sell an equivalent amount of the same security wishes to execute the orders against each other. See PSE Rule 5.14(a). Because he or she already holds both sides of the trade, the member does not want the orders to interact with other market interest. \6\As a general matter, the bid/offer entered at the best price (i.e., the highest bid or the lowest offer) is entitled to priority over bids/offers at inferior prices; similarly, the first bid/offer clearly established at a given price is entitled to priority over other bids/offers at that same price. See PSE Rule 5.8(c). \7\PSE Rule 5.3(b) sets forth the minimum trading differential for securities listed on the PSE. --------------------------------------------------------------------------- The Exchange proposes to formalize several policies that its Equity Floor Trading Committee previously developed to encourage the execution of cross transactions on the PSE. Specifically, the proposed commentary to Rule 5.14(b) will codify the PSE's policy that all efforts should be made to facilitate the execution of crosses; and will clarify which orders a member must satisfy before he or she can execute such a transaction.\8\ The proposed commentary also will interpret Rule 5.14(b), together with the PSE's priority rule,\9\ to prohibit the specialist from participating in a cross to establish or increase his or her position,\10\ unless the member effecting the transactions gives the specialist permission to do so. --------------------------------------------------------------------------- \8\Among other things, see supra note 6 and accompanying text, a member effecting a cross first must satisfy the interest the specialist ``publicly displayed and verbally stated'' at the time of the cross. \9\See PSE Rule 5.8(e). Under this rule, an order originated on the floor to establish or increase a proprietary position must yield to any order originated off the floor. \10\According to the PSE, this policy initially was established on May 2, 1984. In conjunction with this filing, the Exchange has clarified that the specialist will be able to participate in a cross transaction in order to decrease his or her position. See Amendment No. 1, supra, note 3. Under those circumstances, the specialist's participation will be subject to the additional restrictions discussed below. See infra, notes 11-13 and accompanying text. --------------------------------------------------------------------------- In addition, the Exchange proposes to place additional restrictions on when a specialist can break up a cross transaction.\11\Thus under the proposed commentary to Rule 5.14(b), the specialist will be prohibited from participating, for the benefit of his or her own account, on (1) either side of a customer-to-customer cross,\12\or (2) the customer side of a cross with the principal account of a member, where the cross is at a price inside the disseminated PSE market. The PSE, however, will interpret this provision to allow a specialist who is willing to better the price to participate in a cross transaction.\13\Finally, for purposes of Rule 5.14(b), the Exchange will define a ``customer order'' as an order that a broker represents in an agency capacity, including a professional order that is not for an account associated with the executing broker. --------------------------------------------------------------------------- \11\As discussed below, see infra, notes 16-17, the proposed restrictions are based on recent amendments to Philadelphia Stock Exchange (``Phlx'') Rule 126. \12\This restriction will apply whether the customer orders are represented by the same broker or ``by separate agents,'' as defined in Amendment No. 1, supra, note 3. \13\See Amendment No. 2, supra, note 4. --------------------------------------------------------------------------- The PSE believes that the proposed rule change maintains the auction at market principles of price improvement and priority to existing orders, while at the same facilitating the execution of crosses on the PSE. In addition, the PSE believes that the proposed rule change is consistent with policies recently adopted by other exchanges.\14\ The PSE states that the proposed rule change is consistent with Section 6(b)(5) of the Act in that these changes will promote just and equitable principles of trade and will protect investors and the public interest by continuing the effort to remove impediments to a free and open market. --------------------------------------------------------------------------- \14\See infra, note 16. --------------------------------------------------------------------------- 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 sections 6(b) and 11(a).\15\In particular, the Commission believes that the proposed rule change is consistent with the Section 6(b)(5) requirement 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; and with the section 6(b)(8) requirement that the rules of an exchange not impose any unnecessary burden on competition. The Commission also believes that the proposed rule change does not operate in a manner inconsistent with the traditional auction market principle of customer priority, as embodied in section 11(a) of the Act. --------------------------------------------------------------------------- \15\15 U.S.C. 78f(b) (1988). --------------------------------------------------------------------------- After careful review, the Commission has concluded that the proposed rule change should further competition among the exchanges, as well as between exchanges and other markets, and should increase the opportunities for the efficient execution of cross transactions. In the past, the Commission has recognized the competition that exists between various markets for order flow, and especially for block business. Several exchanges recently have sought Commission approval to amend their rules, on the grounds that exchange rules may hinder members' ability to execute a cross transaction without interference and thus may place an exchange at a competitive disadvantage. Despite serious reservations, the Commission has approved those proposals which are consistent with traditional auction market principles.\16\ --------------------------------------------------------------------------- \16\See, e.g., Securities Exchange Act Release Nos. 27205 (August 31, 1989), 54 FR 37180 (September 7, 1989) (File No. SR- Phlx-89-17) (approving Phlx proposal to prohibit members from interfering, with either side of an agency cross or the customer side of a facilitation cross, by buying or selling for their own account at the cross price; except that a specialist can participate to the extent of a publicly disseminated bid or offer at that price); and 31343 (October 21, 1992), 57 FR 48645 (October 27, 1992) (File No. SR-NYSE-90-39) (approving New York Stock Exchange (``NYSE'') ``clean cross'' proposal to allow members to execute agency crosses of 25,000 shares or more, at a price at or within the prevailing quotation, without interference, irrespective of any pre- existing bids or offers at the cross price; however, the cross could be broken up at a better price). Several other proposals to facilitate the execution of crosses on a given exchange are pending with the Commission, including File Nos. SR-Amex-92-41 (American Stock Exchange ``clean cross'' proposal) and SR-MSE-93-05 (Chicago Stock Exchange proposal to encourage specialists to refrain from interfering in cross transactions). --------------------------------------------------------------------------- In response to today's competitive market environment, the PSE has proposed to codify its policy that members should make their best efforts not to interfere in another member's cross transaction and, in particular, that the specialist should not participate unless he or she is liquidating a position. The PSE also has proposed to add a new requirement, based on a comparable rule on the Phlx, that the specialist's proprietary bid or offer yield to the customer side of a cross transaction at the cross price.\17\ Looking at the proposal as whole, the Commission believes that it will clarify the roles of various market participants and assure that, under routine circumstances, crosses are executed in a fair and orderly manner. In sum, the Commission finds that this proposed rule change should improve the PSE's ability to compete for block business and should enhance the depth and liquidity of the Exchange market.\18\ --------------------------------------------------------------------------- \17\As noted above, this part of the PSE proposal is based on recent amendments to Phlx Rule 126. See supra, note 16. Briefly, the Phlx requires that a member's proprietary bid or offer yield to the customer side of a cross transaction at the cross price. In approving the Phlx proposal, the Commission took note of the fact that most principal trading activity on the floor of that regional stock exchange, other than facilitation crosses, is undertaken by the specialist. \18\The Commission appreciates all the exchanges' competitive concerns with respect to the facilitation of cross transactions and, at the same time, continues to emphasize the importance of adherence with traditional auction market principles. --------------------------------------------------------------------------- In terms of auction market principles, the Commission believes that the proposed rule change strikes an appropriate balance between the competing needs of various customer orders represented for execution on the PSE and the proprietary trading operations of Exchange members and member organizations, including specialists. The Commission notes that Rule 5.14(b) will continue to require that a member effecting a cross transaction first assure that all existing bids or offers on the specialist's book or represented in the trading crowd, at or better than the cross price, are filled at their limits.\19\ On that basis, the Commission has concluded that the PSE proposal adheres to the auction market principles of time and price priority and that this method for the execution of crosses (and, in particular, the priority granted to the customer side of the transaction) will not disadvantage existing orders.\20\ In fact, limit orders on the PSE which coincide with the cross price could benefit from being assured of receiving an execution at that price. --------------------------------------------------------------------------- \19\See supra, note 6. \20\In this regard, the PSE proposal contrasts favorably with other rule changes approved by the Commission, such as the NYSE's clean cross proposal, see supra note 16. --------------------------------------------------------------------------- Furthermore, the Commission finds that the PSE proposal does not restrict the opportunity for customer orders to receive price improvement. To this end, the Commission interprets the proposed commentary to Rule 5.14(b), and the Exchange agrees with that interpretation,\21\ to allow the specialist to participate in a cross transaction to provide one side with a better price, notwithstanding the other provisions of this rule.\22\ In addition, under the PSE's method, it is possible for interest in the trading crowd, including an order for the principal account of a member, to break up the cross and to improve the price. --------------------------------------------------------------------------- \21\See Amendment No. 2, supra, note 4. \22\Id. --------------------------------------------------------------------------- Finally, the Commission believes that the PSE proposal would not grant priority, parity or precedence to the order of a member in a manner inconsistent with section 11(a)(1)(G) of the Act or SEC Rule 11a1-1(T)(a)(3) thereunder.\23\ For purposes of its proposed rule change, the PSE has defined the term ``customer order'' as an order that a broker represents in an agency capacity, including a professional order that is not for an account associated with the executing broker. Because this definition of ``customer order'' excludes (and, thus, does not grant priority to) an order for an account over which the broker or an associated person of the broker exercises investment discretion, the Commission is satisfied that the proposed rule change complies with section 11(a). --------------------------------------------------------------------------- \23\17 CFR 240.11a1-1(T)(a)(3). --------------------------------------------------------------------------- The Commission finds good cause for approving Amendments No. 1 and No. 2 prior to the thirtieth day after the date of publication of notice of filing thereof. Amendments No. 1 and No. 2 merely clarify certain language used in the original filing and make no substantive changes to the proposed rule. Finally, the Commission did not receive any comments on the original proposal, which was noticed for the full statutory period. Interested persons are invited to submit written data, views and arguments concerning Amendments No. 1 and No. 2 to the proposed rule change. 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 rules change that are filed with the Commission, and all written communications relating to Amendments No. 1 and No. 2 between the Commission and any persons, 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 in the Commission's Public Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies of such filing will also be available at the principal office of the PSE. All submissions should refer to File No. SR-PSE-91-11 and should be submitted by January 25, 1994. IV. Conclusion It is therefore ordered, pursuant to section 19(b)(2) of the Act,\24\ that the proposed rule change (SR-PSE-91-11), including Amendments No. 1 and No. 2 on an accelerated basis, is approved. \24\15 U.S.C. 78s(b)(2) (1988). --------------------------------------------------------------------------- For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\25\ --------------------------------------------------------------------------- \25\17 CFR 200.30-3(a)(12) (1991). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 94-46 Filed 1-3-94; 8:45 am] BILLING CODE 8010-01-M --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-46. Public record. Not legal advice.