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)

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.