[Federal Register Volume 60, Number 52 (Friday, March 17, 1995)]
[Notices]
[Pages 14471-14473]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-6571]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35474; File No. SR-BSE-95-03]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to Proposed Rule Change by Boston Stock 
Exchange, Inc. Relating to an Extension of a Pilot Program for Stopping 
Stock in Minimum Variation Markets

March 10, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 13, 1995, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the self-
regulatory organization. On February 28, 1995, the BSE submitted to the 
Commission Amendment No. 1 to the proposed rule change in order to 
clarify certain language in the original filing and to request 
accelerated approval of the proposal.\3\ The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1991).
    \3\See letter from Karen A. Aluise, Assistant Vice President, 
BSE, to Beth A. Stekler, Attorney, Division of Market Regulation, 
SEC, dated February 28, 1995 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange seeks a four month extension of its pilot program 
regarding stopping stock in minimum variations markets.\4\ The text of 
the proposed rule change is available at the Commission.

    \4\The Commission initially approved the BSE's proposal to 
codify procedures for stopping stock and to establish a pilot 
program permitting specialists to stop stock in minimum variation 
markets in Securities Exchange Act Release No. 35068 (December 8, 
1994), 59 FR 64717 (December 15, 1994) (File No. SR-BSE-94-09) 
(``1994 Pilot Approval Order''). See also Ch. II, Sec. 38 of the BSE 
Rules.
    Independent of the BSE's request for an extension of its pilot 
program, the Commission has received a comment letter regarding 
permanent approval of the New York Stock Exchange's procedures for 
stopping stock in minimum variation markets. See letter from Junius 
W. Peake, Monfort Professor of Finance, University of Northern 
Colorado, to Secretary, SEC, dated March 1, 1995. The comment letter 
addresses the broader issue of whether stopping stock is consistent 
with the specialist's agency obligations and recommends that the 
Commission not grant permanent approval to the minimum variation 
market pilot programs. The current BSE filing, however, merely 
extends its pilot program for four months to permit additional 
information to be gathered and reviewed. The Commission believes 
that it would be more appropriate to address the issues raised by 
the comment letter in the context of proposals requesting permanent 
approval of the exchanges' stopping stock pilot programs.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
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 III below. The self-regulatory 
organization 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 purpose of the proposed rule change is to extend the SEC-
approved pilot provision regarding the execution of stopped orders in 
minimum variation markets for an additional four months. The pilot 
provision expires on March 21, 1995, and this proposal would extend the 
pilot until July 21, 1995.
    The pilot rule requires the execution of stopped orders in minimum 
variation markets (a) after a transaction takes place on the primary 
market at the stop price or higher in the case of a buy order (lower in 
the case of a sell order), (b) after the applicable Exchange share 
volume is exhausted or (c) at any time prior to (a) or (b) if filled at 
an improved price.\5\ In no event will a stopped order be executed at a 
price inferior to the stop price. The Exchange states that, as in the 
case of greater than minimum variation markets, the proposed rule will 
continue to benefit customers because they might receive a better price 
than the stop price, yet it also protects prior-entered same-price 
limit orders on the book.

    \5\The Commission notes that, in certain narrow circumstances, a 
BSE specialist may execute a stopped order before limit order 
interest on the Exchange is exhausted. To do so, however, the 
specialist must make the determination that such action is 
necessary, in his or her professional judgment, to prevent an 
execution that would create a new high or new low, a double up or 
down tick or an out-of-range print.
    Moreover, the specialist must follow certain procedures designed 
to ensure that the BSE's limit order book is adequately protected. 
First, the specialist must split any contra-side order flow between 
the stopped order and limit orders with priority at the better 
price. In addition, if the specialist elects to fill a stopped order 
at a price better than the stop price before it is otherwise due an 
execution, he or she must allocate an equal number of shares, up to 
a maximum of 500 shares, to orders at that price on the limit order 
book. Finally, if any portion of a stopped order remains unexecuted 
at the end of the trading day, the specialist must fill such order 
in its entirety and, as described above, allocate an appropriate 
number of shares to the book.
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b)(5) of the 
Act in that it furthers the objectives to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to and [[Page 14472]] facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system and, 
in general, to protect investors and the public interest; and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers or dealers.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. 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. 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 
submissions should refer to File No. SR-BSE-95-03 and should be 
submitted by April 7, 1995.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    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(b).\6\ In 
particular, the Commission believes the proposal is consistent with the 
Section 6(b)(5) requirements 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. The Commission also believes that the proposed 
rule change is consistent with the requirement of Section 11(b), and 
Rule 11b-1 thereunder,\7\ that specialist transactions must contribute 
to the maintenance of fair and orderly markets.

    \6\15 U.S.C. 78f(b) (1988).
    \7\17 CFR 240.11b-1 (1991).
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    In its order approving the pilot procedures,\8\ the Commission 
asked the BSE to study the effects of stopping stock in a minimum 
variation market. Specifically, the Commission requested information on 
(1) the number of orders stopped in minimum variation markets; (2) the 
average size of such orders; and (3) the percentage of stopped orders 
that received price improvement. In addition, the Commission encouraged 
the BSE to develop an appropriate measure of the pilot program's impact 
on limit orders, particularly those limit orders on the specialist's 
book ahead of the stopped stock.

    \8\See 1994 Pilot Approval Order, supra, note 4.
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    Although the BSE has begun to gather certain information requested 
by the Commission and to upgrade its technological capabilities in this 
regard, there has not been sufficient time since initial approval of 
the pilot program for the Exchange to produce conclusive results. The 
Commission believes that the BSE needs to submit comprehensive data on 
the operation of this rule and, in particular, on the impact on limit 
orders on the specialist's book before the Commission fairly can 
evaluate the BSE's use of its pilot procedures. To allow such 
information to be gathered and reviewed, the Commission believes that 
it is reasonable to extend the pilot program until July 21, 1995. 
During this extension, the Commission expects the BSE to respond fully 
to the concerns set forth below.
    The Commission historically has been concerned that the practice of 
stopping stock may compromise the specialist's fiduciary duty to 
unexecuted customer orders on the limit order book.\9\ The Commission, 
however, has approved the practice in limited circumstances where the 
potential harm is offset by the improvement in marketplace liquidity 
and the possibility of price improvement for the customer. Accordingly, 
those exchanges with stopping stock rules,\10\ including the BSE, 
require their specialists to reduce the spread between the consolidated 
best bid and offer or, in a minimum variation market, to add size at 
the inside quote. The Commission believes that such a requirement 
strikes an appropriate balance between the interests of various market 
participants. Moreover, by encouraging accurate representation of the 
trading interest held by the specialist, it also facilitates greater 
transparency in the securities markets.

    \9\See, e.g., SEC, Report of the Special Study of the Securities 
Markets of the Securities and Exchange Commission, H.R. Doc. No. 95, 
88th Cong., 1st Sess. Pt. 2 (1963).
    When stock is stopped, book orders on the opposite side of the 
market that are entitled to immediate execution lose their priority. 
If the stopped order then receives a better price, limit orders at 
the stop price are bypassed and, if the market turns away from that 
limit, may never be executed.
    \10\See NYSE Rule 116.30; American Stock Exchange (``Amex'') 
Rule 109; and Article XX, Rule 12 of the Chicago Stock Exchange 
(``CHX'') Rules. The relevant NYSE, Amex and CHX rules incorporate 
their pilot programs to permit specialists to stop stock in minimum 
variation markets. See also Securities Exchange Act Release No. 
34614 (August 30, 1994), 59 FR 46280 (September 7, 1994) (File No. 
SR-Phlx-93-41) (approving a Philadelphia Stock Exchange (``Phlx'') 
proposal to codify its procedures for stopping stock into Equity 
Floor Procedure Advice A-2, Stopping Orders).
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    Despite these potential benefits, the Commission continues to be 
particularly concerned that, in minimum variation markets, limit orders 
on the specialist's book may be bypassed when stopped orders are 
executed at a better price. For that reason, the Commission has 
required that procedures for stopping stock in minimum variation 
markets be implemented on a pilot basis. These pilot programs have been 
extended until July 21, 1995, in order to allow the Commission and the 
relevant exchanges to determine whether the benefits of the practice 
substantially outweight the costs thereof.\11\

    \11\For further discussion of the NYSE, Amex and CHX pilot 
programs and the Commission's rationale for extending them until 
July 21, 1995, see Securities Exchange Act Release Nos. 35309 
(January 31, 1995), 60 FR 7247 (February 7, 1995) (File No. SR-NYSE-
95-02); 35310 (January 31, 1995), 60 FR 7236 (February 7, 1995) 
(File No. SR-Amex-95-01); and 35431 (March 1, 1995) (File No. SR-
CHX-95-04).
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    The Commission has concluded that it is appropriate to place the 
BSE on equal competitive footing with the other exchanges by extending 
its pilot program until July 21, 1995. Nevertheless, the Commission 
believes that the BSE rule, specifically the provisions regarding 
execution of stopped orders at an improved price before limit order 
interest at the price is exhausted,\12\ raises certain unique issues. 
Accordingly, before the Commission would consider another extension or 
permanent approval of the Exchange's pilot program, the Commission 
would expect the BSE to submit comprehensive quantitative data on the 
impact of stopping stock in minimum variation markets on customer limit 
orders on the specialist's book and to demonstrate that the Exchange 
has the technological capabilities necessary to monitor specialist 
compliance with the pilot procedures.

    \12\See supra, note 5.
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    At a minimum, the Commission requests that the BSE calculate (1) 
the average number of limit orders and the average number of shares on 
the book ahead of the stopped stock and (2) how much of that volume 
typically is executed by the close. Similarly, the Exchange should 
determine how often limit orders against which stock is stopped in a 
minimum variation market are executed by the close of the day's 
trading. This should include a one-day review of all book orders in the 
five stocks receiving the greatest numbers of stops.
    Finally, in its order initially approving the BSE proposal, the 
Commission requested that the BSE determine how often stopped orders 
received price improvement and which investors were most affected by 
the pilot program. At this time, the Commission believes that further 
information is necessary to ensure that BSE specialists are handling 
stopped orders in a manner which is consistent with their obligation to 
maintain fair and orderly markets. Accordingly, the Exchange should 
continue to monitor (1) the number of orders stopped in minimum 
variation markets; (2) the average size of such orders; and (3) the 
percentage of stopped orders that receive price improvement.
    The Commission requests that the BSE submit a report describing its 
findings on the above matters by April 15, 1995. In addition, if the 
Exchange determines to request an extension of the pilot program beyond 
July 21, 1995, the BSE should submit to the Commission a proposed rule 
change by April 15, 1995.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of filing thereof. This will permit the pilot program to 
continue on an uninterrupted basis. In addition, the procedures the 
Exchange proposes to continue using are the identical procedures that 
were published in the Federal Register for the full comment period and 
were approved by the Commission.\13\ [[Page 14473]] 

    \13\No comments were received in connection with the proposed 
rule change that implemented these procedures. See Approval Order, 
supra note 4.
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    It is therefore ordered, pursuant to Section 19(b)(2)\14\ that the 
proposed rule change (SR-BSE-95-03) is hereby approved on a pilot basis 
until July 21, 1995.

    \14\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.\15\

    \15\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-6571 Filed 3-16-95; 8:45 am]
BILLING CODE 8010-01-M