Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Chicago Stock Exchange, Inc., Relating To Crossing Orders of 25,000 Shares or More

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40758; File No. SR-CHX-98-27]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Chicago Stock Exchange, Inc., Relating To Crossing Orders

of 25,000 Shares or More

December 8, 1998.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice

is hereby given that on November 5, 1998, the Chicago Stock Exchange,

Inc. (``CHX'' or ``Exchange'') filed with the Securities and Exchange

Commission (``SEC'' or ``Commission'') the proposed rule change as

described in Items I, II, and III below, which Items have been prepared

by CHX. The Commission is publishing this notice to solicit comments on

the proposed rule change from interested persons.

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\1\ 15 U.S.C. 78s(b)(1).

\2\ 17 CFR 240.19b-4.

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I. Self-Regulatory Organization's Statement of the Terms of

Substance of the Proposed Rule Change

CHX is proposing to add Interpretation and Policy .02 to Article

XX, Rule 23 of the Exchange's rules relating to the execution of

certain cross transactions involving 25,000 shares or more on the

Exchange's floor. The text of the proposed rule change is available at

the Office of the Secretary, CHX and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, CHX included statements

concerning the purpose of and 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. CHX 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 Exchange's general auction market procedures are codified in

CHX Article XX, Rule 16, which provides for the manner in which bids

and offers at the same price will be sequenced for execution. A member

who makes the first bid or offer at a particular price has ``priority''

at that price, which means that the member is the first one in the

market to be entitled to receive an execution at that price. If no

member can claim priority, all members who are bidding or offering at a

particular price are deemed to be on ``parity'' with each other, or

equivalent in status.\3\

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\3\ Members are on parity with each other when two or more bids

or offers are announced simultaneously, or after a trade takes place

leaving several bids or offers unfilled at the same price as the

executed trade. See CHX Art. XX, Rule 16 (b) and (c).

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[[Page 69126]]

Unlike the rules of certain other exchanges,\4\ however, the CHX

does not currently permit bids and offers that have parity to obtain

precedence based on size (a so-called ``size-out'' rule).\5\ In

addition, unlike some other exchanges,\6\ the CHX does not currently

have a ``clean cross'' rule (as an exception to the normal priority

rules) that would permit a member to cross a large block of stock,

without the cross being broken up, by permitting the cross to obtain

priority over all other existing bids and offers at the same price,

regardless of the size of such bids or offers.\7\

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\4\ See New York Stock Exchange (``NYSE'') Rule 72 and similar

Philadelphia Stock Exchange and Boston Stock Exchange rules. The

American Stock Exchange (``Amex'') has a modified version of a

``size out'' rule for crosses of 25,000 shares or more. See Amex

Rule 126(g), commentary .01 and .02.

\5\ Under a typical size-out rule, the priority of existing bids

and offers are first removed by means of a sale so that all bids and

offers are on parity. Then, a person desiring to execute a cross can

usually do so by claiming precedence based on size, so long as the

size of the cross is greater than any other single bid or offer at

that price.

\6\ See, e.g., NYSE Rule 72(g) which gives priority to an agency

cross transaction of 25,000 shares or more that is executed at or

within the prevailing quotation, without regard to the size or price

of existing bids or offers on the floor. Other members can typically

interact with the cross only by bettering one side of the cross, and

even then, can only do so after satisfying all other existing bids

or offers at that price. The Pacific Exchange, Inc. (``PCX'') and

Amex have similar crossing rules.

\7\ While the CHX does have a crossing rule, Article XX, Rule

23, this rule only permits crosses between (and not at) the CHX

disseminated market. Thus, under current rules, assuming a

specialist has properly reflected all limit orders from his book in

his quote, the crossing rule does not have any effect on the

Exchange's general priority, parity and precedence rules because all

crosses must be at a better price than the disseminated market.

Therefore, they are entitled to priority because of price (and not

because of a special priority rule giving certain crosses priority

over other bids and offers).

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The purpose of the proposed rule filing is to add new

interpretation and policy .02 to Article XX, Rule 23, to allow a member

or member organization who has an order to buy and an 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, without the

transaction being broken up at the cross price so long as (i) the size

of the proposed cross transaction is of a size that is greater than the

aggregate size of all interest communicated on the Exchange floor at

that price at the time of the proposed cross, and (ii) neither side of

the cross is for the account of the executing member or member

organization.

As is the case for cross transactions that are permitted under

existing CHX rules, prior to effecting the cross under the new

proposal, the member will be required to make a public bid and offer on

behalf of both sides of the cross.\8\ The offer must be made at a price

which is higher than the bid by the minimum trading variation permitted

for such security. Under the proposal, another member may trade with

either the bid or offer side of the cross transaction only to provide a

price which is better than the cross price as to all or part of such

bid or offer. A member who is providing a better price to one side of

the cross transaction must trade with all other market interest having

priority at that price before trading with any part of the cross

transaction.

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\8\ See CHX Art. XX, Rule 23.

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Because the proposal provides that the bid or offer of the member

desiring to execute the cross would be entitled to priority at such

price (over pre-existing bids and offers at that price) only if the

size of the cross is greater than the aggregate size of all interest

communicated on the Exchange floor (which includes the specialist's bid

or offer--including any limit order reflected in such quote--and any

communicated interest of floor brokers or market makers standing in the

crowd), the proposed rule is more akin to a size-out rule rather than a

special priority rule.

The difference between the CHX proposal and the size-out rules

contained on other exchanges is that the priority of earlier bids and

offers will not have to be removed, by means of a sale, before

effecting the cross. In addition, a cross transaction effected in the

CHX proposal does not affect the priority of existing orders in a

specialist's book, and once the cross is executed, such priority (based

on time rather than size) shall remain as it was before the execution

of the cross transaction. In this sense, the proposal does have some

attributes of a special priority rule. However, unlike the special

priority rule afforded certain crosses on other exchanges, which are

reported to the tape as ``stopped stock,'' cross transactions effected

under the proposed rule will be reported to the tape without a ``tape

designator.''

The CHX proposal limits the types of orders eligible to be crossed.

Specifically, as stated above, no part of the cross can include an

order for the account of the executing member or member organization.

Under the proposal, only customer orders of a floor broker (i.e.,

orders in which the floor broker acts as agent) can be included in the

cross. For purposes of this proposal, the terms customer order includes

professional orders not for the account of the executing member (i.e.,

orders for the accounts of broker-dealers and other members or member

organizations communicated from off the floor).

The proposal is intended to facilitate the execution of certain

cross transactions on the CHX. The Exchange asserts that confining the

proposed size threshold to block size orders of 25,000 shares or more

would limit the effects of the rule primarily to actively traded,

liquid securities.

The CHX further believes that the proposal, as drafted, furthers

the important auction market principle of price improvement by allowing

another member, certain conditions, to trade with either the bid or

offer side of the cross transaction to provide a price that is better

than the proposed cross price.

Finally, the Exchange believes that limiting the proposal to

crosses not involving principal transactions of the executing broker

(i.e., limiting the proposal to orders in which the floor broker is

acting as agent), is consistent with Section 11(a)(1)(G) of the Act \9\

as well as portions of other crossing rules at other exchanges. For

example, in approving a crossing rule for the PCX, the Commission

stated that it ``believes that the [PCX] 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 Rule 11a1-

1(T)(a)(3) thereunder.'' \10\ The PCX proposal defined customer to

include any order that the broker represents in an agency capacity,

including a professional order that is not for an account associated

with the executing brokers. The Commission concluded that 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).'' \11\

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\9\ 15 U.S.C. 78k(a)(1)(G).

\10\ See Exchange Act Release No. 33391 (December 28, 1993), 59

FR 336 (January 4, 1994) (order approving SR-PSE-91-11).

\11\ Id.

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2. Statutory Basis

The CHX believes that the proposed rule change is consistent with

Section 6(b)(5) of the Act \12\ in that it is designed to promote just

and equitable principles or trade, to remove impediments 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.

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\12\ 15 U.S.C. 78f(b)(5).

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[[Page 69127]]

B. Self-Regulatory Organization's Statement on Burden on Competition

CHX does not believe that the proposed rule change will impose any

inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed

Rule Change Received From Members, Participants, or Others

Written comments were neither solicited nor received.

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 longer 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, including whether the proposal is

consistent with the Act. Persons making written submissions should file

six copies thereof with the Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W., Washington, D.C. 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 Room. Copies of such filing will also be available for

inspection and copying at the principal office of the CHX.

All submissions should refer to File No. SR-CHX-98-27 and should be

submitted by January 5, 1999.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\13\

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\13\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98-33135 Filed 12-14-98; 8:45 am]

BILLING CODE 8010-01-M