[Federal Register Volume 59, Number 247 (Tuesday, December 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31673]


[[Page Unknown]]

[Federal Register: December 27, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35116; International Series Release No. 762; File No. 
SR-BSE-94-01]

 

Self-Regulatory Organizations; Boston Stock Exchange, Inc; Order 
Granting Approval to Proposed Rule Change and Notice of Filing and 
Order Granting Accelerated Approval to Amendment No. 1 to Proposed Rule 
Change Relating to the Boston-Montreal Linkage

December 19, 1994.

I. Introduction

    On February 7, 1994, the Boston Stock Exchange, Inc. (``BSE'' 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 establish a northbound trading 
linkage with the Montreal Exchange (``ME''). On November 7, 1994, the 
BSE submitted amendment no. 1 to the rule filing.\3\
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1993).
    \3\See letter from Karen A. Aluise, Assistant Vice President, 
BSE, to Holly Smith, Associate Director, SEC, dated November 1, 
1994.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 34456 (July 28, 1994), 59 FR 39802 (August 4, 
1994). No comments were received on the proposal.

II. Background

    In 1984, the Commission approved the first phase of a southbound 
linkage between the BSE and the ME for the routing of orders for the 
purchase and sale of securities listed on the BSE.\4\ The initial phase 
of the linkage permitted ME members to direct to the BSE marketable 
limit orders in approximately forty U.S.-listed Canadian national 
stocks available for trading on the Intermarket Trading System 
(``ITS''). In 1985, phase two of the linkage was approved permitting 
the BSE to expand the list of securities eligible to be traded on the 
linkage to include most ITS securities traded on the BSE.\5\
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    \4\See Securities Exchange Act Release No. 21449 (November 1, 
1984), 49 FR 44575.
    \5\See Securities Exchange Act Release No. 21925 (April 8, 
1985), 50 FR 14480.
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    In 1989, the Commission approved a Linkage Plan that allowed the 
BSE to connect the southbound linkage with the BSE's automated 
communications order-routing network (``BEACON'') system.\6\ The 
Commission also approved at that time a generic linkage rule that 
allows the Exchange to establish trading linkages, provided that the 
BSE submits a Linkage Plan for each new proposed linkage to the 
Commission for its approval.\7\
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    \6\See Securities Exchange Act Release No. 27080 (July 31, 
1989).
    \7\See supra note 6. Under the Linkage Rule, the Exchange is 
required to file with the Commission a Linkage Plan that contains 
the details of each proposed new linkage pursuant to Section 19(b) 
of the Act, 15 U.S.C. Sec. 78s(b).
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III. Description of the Proposal

    The proposed rule change establishes a trading linkage for the 
transmission of orders in certain Canadian securities from the BSE to 
the ME (``northbound linkage''). The linkage will be administered 
pursuant to the Linkage Plan agreement between the BSE and ME. The 
Linkage Plan contains provisions relating to management of the linkage, 
resolution of trade disputes, comparison and settlement of trades, and 
surveillance of transactions.\8\
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    \8\The Exchange has filed with the Commission a trade execution 
monitoring program for the surveillance of orders directed to the ME 
from the BSE's BEACON system.
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    As a result of the northbound linkage, BSE members will be able to 
route orders for dually traded Canadian securities\9\ directly to the 
ME for execution. The broker-dealers may enter orders for Canadian 
securities into their in-house electronic systems, which are linked to 
the BSE's BEACON system. BEACON receives and records the details of 
each order\10\ before routing them directly to the ME's automated 
order-routing and execution system.\11\ The ME system then logs each 
order and directs it to the ME specialist's electronic book.\12\
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    \9\To be eligible for trading over the northbound linkage, 
securities must be registered with the Commission pursuant to 
Section 12(b) of the Act, 15 U.S.C. Sec. 78l(b). Each eligible 
Canadian security will either be listed on the BSE or traded on the 
BSE pursuant to unlisted trading privileges under Section 12(f) of 
the Act, 15 U.S.C. Sec. 78l(f).
    \10\The order will contain the terms for the price, if any, 
stated in Canadian dollars, and an identifier indicating that its 
transmission is for the ME.
    \11\The BSE specialists assigned to the eligible Canadian 
securities are not given an opportunity to interact with orders 
routed directly to the ME.
    \12\The northbound orders routed through the BSE linkage to the 
ME will be handled by the ME according to the same rules and 
policies as orders sent to the ME floor from Canadian broker-
dealers.
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    Upon the execution of a U.S. customer's order on the ME, a customer 
report is sent from the ME specialist's book through the ME system to 
the BEACON system, with both systems logging in the details of the 
report. BEACON then sends the report to the U.S. broker-dealer's in-
house system. The trades are cleared in Canada pursuant to the BSE 
member's agreement with a Canadian correspondent to clear and settle 
trades at the Canadian Depository for Securities (``CDS'') on its 
behalf.\13\ 
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    \13\BSE members will give up a valid CDS account at execution 
and will be treated like a customer of the Canadian correspondent. 
This is the clearing arrangement that U.S. broker-dealers currently 
utilize in clearing trades in Canadian stocks.
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IV. 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).\14\ 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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    \14\15 U.S.C. 78f(b).
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    The Commission generally views agreements between the United States 
and foreign securities exchanges as positive developments that reflect 
and contribute to the increasing internationalization of the world's 
securities markets.\15\ Linkages, in particular, facilitate the flow of 
capital and financial services across borders. Currently, when a BSE 
member has customer orders for Canadian securities to be traded on the 
ME, it must make arrangements with a Canadian broker-dealer (ME member) 
to place the orders on the ME for execution. The linkage proposed by 
the BSE will establish an order routing mechanism for the transmission 
of orders from BSE members to the ME involving Canadian securities 
traded on the ME and also registered under Section 12(b) of the Act. As 
a result, the linkage should improve the efficient handling of such 
orders routed by BSE members on behalf of their customers to the ME.
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    \15\In addition to the BSE linkages with the ME, the Commission 
has previously approved a linkage between the Toronto Stock Exchange 
and the American Stock Exchange, see Securities Exchange Act Release 
No. 21441 (October 31, 1984), 49 FR 44575 (November 7, 1984), and a 
linkage between the Toronto Stock Exchange and the Midwest Stock 
Exchange (now the Chicago Stock Exchange), see Securities Exchange 
Act Release No. 23075 (March 28, 1986), 51 FR 11854 (April 7, 1986). 
Neither of these linkages with the Toronto Stock Exchange is 
currently in operation.
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    The Commission notes that the northbound linkage is not intended to 
create a single market or to ``link'' the BSE and ME marketmaking 
functions for dually listed securities.\16\ Although the northbound 
trading linkage uses the BSE's BEACON system to communicate orders to 
the ME, trading between the ME and BSE specialists will not be 
coordinated, nor will a BSE specialist be allowed to interact with U.S. 
customer orders entered by broker-dealers into the northbound linkage 
for routing to the ME. Nevertheless, agency duties will require BSE 
members to route orders to the market that will provide the best 
execution.\17\ Accordingly, customers should not be disadvantaged by a 
BSE member's decision to route their orders to a particular market.\18\ 

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    \16\For example, as with trading in any security dually listed 
on a U.S. exchange and a foreign exchange, the BSE and ME 
specialists' books will not be consolidated, and there is no time or 
price priority in relation to orders placed on the other exchange.
    \17\A broker-dealer must seek to obtain the best execution for 
customer orders. Best execution generally means that a broker-dealer 
must obtain the most favorable terms available under the 
circumstances for a customer's transaction. A broker-dealer's duty 
to seek to obtain the best execution of customer orders derives from 
the common law agency duty of loyalty, which obligates an agent to 
act exclusively in the principal's best interest. This common law 
agency principle has been incorporated into case law and Commission 
decisions under the federal securities laws. See Division of Market 
Regulation, SEC, Market 2000: An Examination of Current Equity 
Market Developments (January 1994), at Study V.
    \18\The Commission expects the BSE to remind its members of 
their best execution obligation in entering orders through the 
northbound linkage.
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    The Commission has reviewed the Linkage Plan for the northbound 
linkage between the BSE and ME to ensure that it will provide U.S. 
investors with protection against fraudulent and manipulative acts. The 
Commission believes that a surveillance sharing agreement between 
markets proposing to develop linkages for order routing purposes is an 
essential element to any Linkage Plan. Such agreements ensure the 
quality of information necessary to detect or deter potential 
manipulation and other trading abuses. In this regard, the BSE is a 
member and the ME is an affiliate members of the Intermarket 
Surveillance Group (``ISG''), which provides for the exchange of 
necessary surveillance information. ISG coordinates surveillance and 
investigative information sharing arrangements in the stock and options 
markets.\19\ The Commission believes that this structure should enhance 
the level of cooperation between the BSE and ME surveillance 
departments with regard to transactions executed through the northbound 
linkage.
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    \19\ISG was formed in July 1983. See Intermarket Surveillance 
Group Agreement, July 14, 1983. The most recent amendment to the ISG 
Agreement, which incorporates the original agreement and all 
amendments made thereafter, was signed by ISG members in January 
1990. See Second Amendment to the Intermarket Surveillance Group 
Agreement, January 29, 1990.
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    In addition, the Commission notes that each northbound trade will 
be entered into the ME's electronic book, and will therefore be subject 
to the ME's on-line stock trading monitoring system (``SECMA'').\20\ 
Furthermore, the BSE and ME have developed a trade execution monitoring 
program for the surveillance of orders directed to the ME from the 
BSE's BEACON system. These surveillance procedures should also help to 
detect as well as deter any potential manipulation.
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    \20\The ME currently focuses its trading reviews on insider 
trading, trading on non-public market information (``front 
running''), price manipulation (market fraud of various types, short 
squeeze, short sales down ticking, normal course issue of bid up 
ticking, and restrictions on trading by members involved in a 
distribution. In conducting these types of trading reviews, the ME 
utilizes price alerts, volume alerts, exception reports based on 
high-lows and closing prices, as well as other technical information 
analysis and graphics that are available.
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    In summary, the Commission believes that the BSE has set forth a 
reasonable proposal. In particular, by limiting the northbound linkage 
to securities that are traded on the BSE and registered under Section 
12(b) of the Act, the linkage will provide customers with access to 
executions on the ME, while ensuring that such customers continue to 
receive the protection of the federal securities laws and the rules 
thereunder.
    The Commission finds good cause for approving Amendment No. 1 to 
the rule change prior to the thirtieth day after publication of notice 
of filing thereof. Amendment No. 1 restricts the securities that may be 
traded through the northbound linkage to securities that are registered 
under Section 12(b) of the Act\21\ and therefore limits the scope of 
the rule change as originally proposed. The broader proposed rule 
change was published in the Federal Register for the full statutory 
period and no comments were received.\22\
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    \21\See supra note 3.
    \22\See Securities Exchange Act Release No. 34456 (July 28, 
1994), 59 FR 39802 (August 4, 1994).
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V. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning amendment No. 1. 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 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. Sec. 552, will be available for inspection and 
copying at the Commission's Public Reference Section, 450 Fifth Street, 
NW., Washington, DC 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the BSE. All 
submssions should refer to File No. SR-BSE-94-01 and should be 
submitted by January 17, 1995.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-BSE-94-01) is approved.
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    \23\15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\17CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-31673 Filed 12-23-94; 8:45 am]
BILLING CODE 8010-01-M