[Federal Register Volume 60, Number 145 (Friday, July 28, 1995)]
[Notices]
[Pages 38872-38874]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18601]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36004; File No. SR-BSE-95-13]


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

July 21, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on July 12, 
1995, the Boston Stock Exchange, Incorporated (``BSE'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the self-regulatory organization. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange seeks a nine month extension of its pilot program 
regarding stopping stock in minimum variation markets.\1\

    \1\ The Commission initially approved the BSE's proposal to 
codify procedures for stopping stock and to establish a separate 
pilot program for stopping stock in minimum variation markets in 
Securities Exchange Act Release No. 35068 (Dec. 8, 1994), 59 FR 
64717 (Dec. 15, 1994) (File No. SR-BSE-94-09) (``1994 Pilot Approval 
Order''). The Commission subsequently extended the BSE's pilot 
program in Securities Exchange Act Release No. 35474 (Mar. 10, 
1995), 60 FR 14471 (Mar. 17, 1995) (File No. SR-BSE-95-03) (``March 
1995 Pilot Approval Order'').
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II. Self-Regulatory Organization's Statement of the Propose 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 Commission 
approved pilot provision regarding the execution of stopped orders in 
minimum variation markets for an additional nine months. The pilot 
provision expires on July 21, 1995, and this proposal would extend the 
pilot until April 21, 1996.
    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.\2\ 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.

    \2\ 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 
designeed 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 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 inappropriate burden on competition.

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

    No written comments were either soliciteed or received.

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, 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 

[[Page 38873]]
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, 
N.W., Washington, D.C. 20549. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-BSE-95-13 and 
should be submitted by August 18, 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 Section 6(b) \3\ and Section 11(b) 
\4\ of the Act. Specifically, 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.\5\ that specialist 
transactions must contribute to the maintenance of fair and orderly 
markets.

    \3\ 15 U.S.C. 78f(b) (1988 & Supp. V 1993).
    \4\ 15 U.S.C. 78k (1988).
    \5\ 17 CFR 240.11b-1 (1994).
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    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.\6\ The Commission, 
however, has approved the practice in limited circumstances where the 
potential harm is offset by the improvement in the marketplace 
liquidity and the possibility of price improvement for the customer. 
Accordingly, those exchanges with stopping stock rules,\7\ 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.\8\ 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 market.

    \6\ 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.
    \7\ See NYSE Rule 116.30; American Stock Exchange (``Amex'') 
Rule 109; and Article XX, Rule 37 of the Chicago Stock Exchange 
(``CHX'') Rules. The relevant NYSE, Amex, and CHX pilot programs 
permit specialists to stop stock in minimum variation markets. See 
also Securities Exchange Act Release No. 34614 (Aug. 30, 1994), 59 
FR 46280 (Sept. 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).
    \8\ See Interpretation .50 of Section 38(d), Chapter II of BSE's 
Rules.
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    Despite these potential benefits, the Commission continues to be 
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.\9\ These concerns are particularly applicable to the 
BSE's pilot because of the Exchange's unique provisions regarding the 
execution of stopped orders at an improved price before pre-existing 
limit order interest at that price is exhausted.\10\

    \9\ The NYSE, Amex, and CHX pilot programs for stopping stock in 
minimum variation markets raise concerns with respect to bypassing 
of limit orders on the opposite side of the market from the stopped 
order and not of limit orders on the same side. The BSE's pilot 
program, however, raises concerns with respect to limit orders on 
both sides of the specialist's book because of the special provision 
in the BSE's pilot program regarding the execution of stopped orders 
at an improved price before the pre-existing limit orders. The NYSE, 
Amex, and CHX pilot programs have been extended until October 21, 
1995, to allow the Commission to determine whether the benefits of 
the practice substantially outweigh the costs thereof for permanent 
approval purposes. For further discussion of the NYSE, Amex and CHX 
pilot programs and the Commission's rationale for extending them 
until October 21, 1995, see Securities Exchange Act Release Nos. 
36009 (July 21, 1995), (File No. SR-NYSE-95-26); 36010 (July 21, 
1995), (File No. SR-Amex-95-27); and 36011 (July 21, 1995) (File No. 
SR-CHX-95-17).
    \10\ See supra, note 2. Because the pilot programs on the NYSE, 
Amex, and CHX do not have a similar provision as the BSE regarding 
the execution of stopped orders before pre-existing limit orders and 
the BSE has limitations on its ability to surveil compliance with 
procedures when the stopped orders are executed before pre-existing 
limit orders, the BSE pilot program is only being extended for nine 
months.
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    As a result, in the orders approving the BSE's pilot 
procedures,\11\ the Commission asked the Exchange 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.

    \11\ See 1994 Pilot Approval Order and March 1995 Pilot Approval 
Order, supra, note 1.
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    Although the BSE has provided the Commission with the requested 
information on the number of orders stopped, their average size, and 
the percentage of such orders that received price improvement, the BSE 
has not yet developed a measure of the pilot's impact on limit orders. 
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 can 
evaluate fairly 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 April 21, 1996. 
During this extension, the Commission expects the BSE to respond fully 
to the concerns set forth below.
    Accordingly, before the Commission would consider another extension 
or permanent approval of the Exchange's pilot program, the BSE must 
submit comprehensive quantitative data on the impact of stopping stock 
in minimum variation markets on customer limit orders on the 
specialist's book and demonstrate that the Exchange has the 
technological capabilities necessary to monitor specialist compliance 
with the pilot procedures.
    The Commission requests that the BSE calculate data based on twenty 
stocks chosen by the Commission during three different days showing (1) 
how many orders and shares were stopped in each stock, (2) the average 
number of limit orders and the average number of shares on the book 
ahead of the stopped stock, (3) how many orders and shares received 
price improvement, and (4) how many orders and shares were on the limit 
order book at the time each order was stopped and the number of such 
limit orders and shares that were not executed by the end of the 
trading day. The Exchange should provide the data for each stock for 
each day, aggregate figures for each stock for all three days, and for 
all stocks aggregate numbers for each day and for all three days. The 
Commission requests that the BSE submit a report describing 

[[Page 38874]]
its findings on the above matters by November 17, 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 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.
    It Is Therefore Ordered, pursuant to Section 19(b)(2) \12\ that the 
proposed rule change (SR-BSE-95-13) is hereby approved on a pilot basis 
until April 21, 1996.

    \12\ 15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\

    \13\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-18601 Filed 7-27-95; 8:45 am]
BILLING CODE 8010-01-M