[14166]
November 20, 2001
TO: EQUITY MARKETS ADVISORY COMMITTEE No. 47-01
RE: DRAFT INSTITUTE COMMENT LETTER ON PROPOSED AMENDMENTS TO NYSE
CLEAN CROSS RULE
As we previously informed you,1 the Securities and Exchange Commission issued a
notice of a proposed rule change filed by the NYSE amending NYSE Rule 72 relating to clean
crosses. In particular, the amendment would (1) permit clean crosses of 100,000 shares or more
when an NYSE member organization is facilitating a customer order and (2) provide that a
specialist may not effect a proprietary transaction to break up a cross being effected under Rule
72. The Institute has prepared a draft comment letter on the proposal, a copy of which is
attached.
The draft letter states that the Institute believes that the clean cross rule, as currently
structured, is fundamentally flawed and does not believe that the proposed rule change would
address the concerns of institutional investors. The letter notes that the Institute has expressed
its concern in the past regarding the lack of priority rules for limit orders on the NYSE and that
by permitting the execution of orders notwithstanding preexisting bids or offers on the limit
order book, the clean cross rule promotes the bypassing of preexisting customer interest on the
Exchange. The draft letter therefore recommends that certain changes be made to the clean
cross rule that would better facilitate the trading of large orders.
In particular, the draft letter recommends that the rule provide that a clean cross can
only be executed at or outside the prevailing quotation if all displayed orders on the specialist’s
book at the cross price are satisfied. This would ensure that preexisting orders on the limit
order book would not be disadvantaged. If a market participant does not wish to satisfy all
displayed orders at the cross price, it should be required to provide price improvement to the
clean cross.
The draft letter also recommends that all market participants be prohibited from
breaking up a clean cross. The letter notes that the Exchange’s current proposal would provide
that a specialist could not effect a proprietary transaction to provide price improvement to one
side of a clean cross or the other. The proposal, however, would still permit the non-
proprietary interest of specialists and certain floor brokers to step ahead of customer orders for
the minimum variation. By extending the prohibition to provide price improvement to one side
1 Memorandum to Equity Markets Advisory Committee No. 41-01, dated November 6, 2001.
2
of a clean cross or the other to all entities, the draft letter states that investors will be ensured
that their clean crosses will be executed without being broken up and the “free option” given to
market participants in the crowd would be eliminated.
Comments on the proposed rule change are due to the SEC no later than November
27, 2001. If you have any comments on the draft Institute letter, please provide them to the
undersigned by phone at (202) 371-5408, by fax at (202) 326-5839, or by e-mail at
aburstein@ici.org no later than November 26.
Ari Burstein
Associate Counsel
Attachment (in .pdf format)