[Federal Register Volume 61, Number 6 (Tuesday, January 9, 1996)]
[Notices]
[Pages 672-676]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-236]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36668 ; File No. SR-BSE-95-16]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Boston 
Stock Exchange, Inc. Relating to its Specialist Performance Evaluation 
Program

January 22, 1996.
    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 December 14, 1995, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have 

[[Page 673]]
been prepared by the self-regulatory organization. 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).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The BSE seeks a twelve-month extension of its Specialist 
Performance Evaluation Program (``SPEP'').\3\

    \3\ The SEC initially approved the BSE's SPEP pilot program in 
Securities Exchange Act Release No. 22993 (March 10, 1986), 51 FR 
8298 (March 14, 1986) (File No. SR-BSE-84-04). The SEC subsequently 
extended the pilot program in Securities Exchange Act Release Nos. 
26162 (October 6, 1988), 53 FR 40301 (October 14, 1988) (File No. 
SR-BSE-87-06); 27656 (January 30, 1990), 55 FR 4296 (February 7, 
1990) (File No. SR-BSE-90-01); 28919 (February 26, 1991), 56 FR 9990 
(March 8, 1991) (File No. SR-BSE-91-01); and 30401 (February 24, 
1992), 57 FR 7413 (March 2, 1992) (File No. SR-BSE-92-01). The BSE 
was permitted to incorporate objective measures of specialist 
performance into its pilot program in Securities Exchange Act 
Release No. 31890 (February 19, 1993), 58 FR 11647 (February 26, 
1993) (File No. SR-BSE-92-04) (``February 1993 Approval Order''), at 
which point the initial pilot program ceased to exist as a separate 
program. The current pilot program was subsequently extended in 
Securities Exchange Act Release Nos. 33341 (December 15, 1993), 58 
FR 67875 (December 22, 1993) (``December 1993 Approval Order''); and 
35187 (December 30, 1994), 60 FR 2406 (January 9, 1995). SEC 
approval of the current pilot program expires on December 31, 1995.
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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 incorporate certain 
objective measures into the Exchange's SPEP. The evaluation program, 
using the BEACON system,\4\ looks at all incoming orders routed to a 
specialist for execution. A record of all action on these orders is 
accumulated in a separate file from which four calculations are run.

    \4\ BEACON is the BSE's automated order-routing and execution 
system. BEACON provides a guarantee of execution for market and 
marketable limit orders up to and including 1,299 shares. In 
addition, BEACON can be used to transmit orders not subject to 
automatic execution See BSE Rules, Ch. XXXIII, Paras. 2654-55.
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    Selection criteria for eligible orders include regulator buy and 
sell market and marketable limit orders only. Orders marked buy minus 
or sell plus are excluded, as are crosses and all orders with 
qualifiers (e.g., market-on-close, stop, stop limit, all or none, 
etc.). The order entry date must equal the order execution date.
    For each of the measures, including the Specialist Performance 
Evaluation Questionnaire, a 10 point scale will be applied to a range 
of scores. Based on the raw score for each measure, the respective 
specialist will receive an associated score between one and 10 points, 
which will be weighted as indicated for each measure.
    The first measure is turnaround Time, which calculates the average 
number of seconds for all eligible orders based on the number of 
seconds between the receipt of a guaranteed market or marketable limit 
order in BEACON (i.e., for 1299 shares or less) and the execution, 
partial execution, stopping or cancellation of the order. An order that 
is moved from the auto-ex screen to the manual screen will accumulate 
time until executed, partially executed, stopped or cancelled. This 
calculation will not be in effect until the individual stock has opened 
on the primary market. Certain situations, such as trading halts and 
periods where the BEACON system is off auto-ex floorwide, will result 
in blocks of time being excluded from the calculation. A specialist who 
averaged a raw score of 25 seconds will receive seven points as it 
falls in the 21 to 25 second range. This calculation will comprise 15% 
of the overall evaluation program.

                             Turnaround Time                            
------------------------------------------------------------------------
                      Time in seconds                          Points   
------------------------------------------------------------------------
1-10......................................................           10 
11-15.....................................................            9 
16-20.....................................................            8 
21-25.....................................................            7 
26-30.....................................................            6 
31-35.....................................................            5 
36-40.....................................................            4 
41-45.....................................................            3 
46-50.....................................................            2 
51 and up.................................................            1 
------------------------------------------------------------------------

    The second measure is Holding Orders Without Action, which measures 
the number of market and marketable limit orders (all sizes included) 
\5\ that are held without action for greater than 25 seconds. As in the 
Turnaround Time calculation, a stop, cancellation, execution or partial 
execution stops the clock. The same exclusions which apply in the 
Turnaround Time calculation also apply here.\6\ Thus, if a specialist 
receives a total of 100 market and marketable limit orders and holds 10 
of them for more than 25 seconds, his or her raw score of 10% would 
receive nine points as it falls in the six to 10 percent range. This 
calculation will comprise 15% of the overall evaluation program.

    \5\ Unlike Turnaround Time, Holding Orders Without Action is not 
limited to those orders guaranteed automatic execution through 
BEACON.
    \6\ The Holding Orders Without Action calculation will not be in 
effect until the individual stock has opened on the primary market. 
In addition, certain situations, such as trading halts and periods 
where the BEACON system is off auto-ex floorwide, will result in 
blocks of time being excluded from the Holding Orders Without Action 
calculation. See December 1993 Approval Order.

                      Holding Orders Without Action                     
------------------------------------------------------------------------
                   Percentage of orders                        Points   
------------------------------------------------------------------------
0-5.......................................................           10 
6-10......................................................            9 
11-15.....................................................            8 
16-20.....................................................            7 
21-25.....................................................            6 
26-30.....................................................            5 
31-35.....................................................            4 
36-40.....................................................            3 
41-45.....................................................            2 
46 and up.................................................            1 
------------------------------------------------------------------------

    The third measure is Trading Between the Quote, which measures the 
number of market and marketable limit orders that are executed between 
the best consolidated bid and offer where the spread is greater than 
\1/8\th. Thus, if a specialist receives 10 market and marketable limit 
orders where the spread between the best consolidated bid and offer is 
greater than \1/8\th, and such specialist executes five of the orders 
between the bid and offer, his or her raw score would be 50% and would 
receive nine points as it falls in the 46 to 50 percent range. This 
calculation will comprise 25% of the overall evaluation program.

                        Trading Between the Quote                       
------------------------------------------------------------------------
                   Percentage of orders                        Points   
------------------------------------------------------------------------
51 and up.................................................           10 
46-50.....................................................            9 
41-45.....................................................            8 
36-40.....................................................            7 
31-35.....................................................            6 
26-30.....................................................            5 
21-25.....................................................           4  

[[Page 674]]
                                                                        
16-20.....................................................            3 
11-15.....................................................            2 
0-10......................................................            1 
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    The fourth measure is Executions in Size Greater than BBO, which 
measures the number of market and marketable limit orders which exceed 
the BBO size and are executed in size larger than the BBO size. Thus, 
if a specialist receives a total of 10 market and marketable limit 
orders which exceed the BBO size and executes nine of the orders in 
size larger than the BBO size, his or her raw score would be 90% and 
would receive eight points as it falls in the 86 to 90 percent range. 
This calculation will comprise 25% of the overall evaluation program.

                   Executions in Size Greater Than BBO                  
------------------------------------------------------------------------
                   Percentage of orders                        Points   
------------------------------------------------------------------------
96-100....................................................           10 
91-95.....................................................            9 
86-90.....................................................            8 
81-85.....................................................            7 
76-80.....................................................            6 
71-75.....................................................            5 
66-70.....................................................            4 
61-65.....................................................            3 
56-60.....................................................            2 
55 and below..............................................            1 
------------------------------------------------------------------------

    In addition, several changes have been made to the Specialist 
Performance Evaluation Questionnaire in view of the adoption of the 
objective measures which have made some questions obsolete. The minimum 
acceptable raw score for each question remains at 4.5. Thus, if a 
specialist receives a raw score of 4.5 for each question for a weighted 
raw score (based on the weights for each question within the 
questionnaire) of 50.0052, he or she would receive four points as it 
falls in the 50 to 54 weighted score range. The questionnaire will 
comprise 20% of the overall evaluation program.

                              Questionnaire                             
------------------------------------------------------------------------
                    Weighted raw score                         Points   
------------------------------------------------------------------------
83 and above..............................................           10 
77-82.....................................................            9 
72-76.....................................................            8 
66-71.....................................................            7 
61-65.....................................................            6 
55-60.....................................................            5 
50-54.....................................................            4 
44-49.....................................................            3 
38-43.....................................................            2 
37 and below..............................................            1 
------------------------------------------------------------------------

    Using the examples from each measure above, the following weighted 
point totals would result in an overall program score of 7.45:

------------------------------------------------------------------------
                                                               Weighted 
                    Measure                        Points       points  
------------------------------------------------------------------------
Turnaround Time (15%).........................            7         1.05
Holding Orders Without Action (15%)...........            9         1.35
Trading Between the Quote (25%)...............            9         2.25
Executions in Size > BBO (25%)................            8         2.00
Questionnaire (20%)...........................            4         0.80
                                                            ------------
                                                                    7.45
------------------------------------------------------------------------

    The rule has been amended to reflect that any specialist who is 
deficient \7\ in any one of the objective measures for two out of three 
consecutive review periods will be required to appear before the 
Performance Improvement Action Committee (``PIAC'') to discuss ways of 
improving performance. If performance does not improve in the 
subsequent period, the specialist will appear before the Market 
Performance Committee (``MPC'') for appropriate action, as described 
below.\8\

    \7\ A specialist is deficient in any measure if he or she scores 
below the minimum adequate performance thresholds set forth below. 
See infra text accompanying note 10.
    \8\ The SEC notes that, in the event a specialist's performance 
does not improve, the Supplemental Material to the SPEP authorizes 
the MPC to take the following actions: suspending the specialist's 
trading account privilege, suspending his or her alternate 
specialist account privilege, or reallocating his or her specialty 
stocks. See BSE Rules, Ch. XV, para. 2156.10-2156.60.
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    Any specialist who falls below the threshold level for the overall 
evaluation program for two out of three consecutive review periods will 
be required to appear before the MPC, which will take action to address 
the deficient performance as provided for in the Supplemental Material 
to the SPEP.\9\ A specialist who is ranked in the bottom 10% of the 
overall evaluation program but who is above the threshold level for the 
overall program will be subject to staff review to determine if there 
is sufficient reason to warrant informing the PIAC of potential 
performance problems.

    \9\ See supra note 8.
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    The following threshold scores have been set at which a specialist 
will be deemed to have adequately performed: \10\

    \10\ A specialist who receives a score that is below a minimum 
adequate performance threshold will be deemed to be deficient in 
that measure. See supra note 7.
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Overall Evaluation Score--at or above weighted score of 5.80
Turnaround Time--below 21.0 seconds (8 points)
Holding Orders Without Action--below 21.0% (7 points)
Trading Between the Quote--at or above 26.0% (5 points)
Executions in Size > BBO--at or above 76.0% (6 points)
Questionnaire--at or above weighted score of 50.0 (4 points)

    Due to the subjectiveness of the questionnaire, a specialist who is 
deficient on the questionnaire alone will be subject to review by 
Exchange staff to determine if there is sufficient reason to warrant 
informing the PIAC of potential performance problems. However, a 
deficient score on the questionnaire may result in a performance 
improvement action when it lowers the overall program score below 5.80.
    The Exchange requests an extension of the current pilot program for 
a twelve-month period to begin on January 1, 1995. This twelve-month 
period will enable the Exchange to further evaluate the appropriateness 
of the measures and their respective weights, as well as the 
effectiveness of the overall evaluation program.
2. Statutory Basis
    Section 6(b)(5) of the Act \11\ is the basis of the proposed rule 
change in that the SPEP results weigh heavily in stock allocation 
decisions and, as a result, specialists are encouraged to improve their 
market quality and administrative duties, thereby promoting just and 
equitable principles of trade and aiding in the perfection of a free 
and open market and a national market system.

    \11\ 15 U.S.C. 78f(b)(5).
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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.

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

    No written comments were either solicited 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 

[[Page 675]]
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 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, 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-95-16 and should be submitted by January 30, 
1996.

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

    The Commission believes that specialists play a crucial role in 
providing stability, liquidity, and continuity to the trading of 
stocks. Among the obligations imposed upon specialists by the Exchange, 
and by the Act and the rules promulgated thereunder, is the maintenance 
of fair and orderly markets in their designated securities.\12\ To 
ensure that specialists fulfill these obligations, it is important that 
the Exchange conduct effective oversight of their performance. The 
BSE's SPEP is critical to this oversight.

    \12\ Rule 11b-1, 17 CFR 240.11b-1; BSE Rules Ch. XV, para. 
2155.01.
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    In its order approving the incorporation of objective measures of 
performance,\13\ the Commission asked the Exchange to monitor the 
effectiveness of the amended SPEP. Specifically, the Commission 
requested information about the number of specialists who fell below 
acceptable levels of performance for each objective measure, the 
questionnaire and the overall program; and about the specific measures 
in which each such specialist was deficient. The Commission also 
requested information about the number of specialists who, as a result 
of each condition for review, were referred to the PIAC and/or the MPC; 
and about the type of action taken with respect to each such deficient 
specialist.

    \13\ For a description of the Commission's rationale for 
approving the incorporation of objective measures of performance 
into the BSE's SPEP on a pilot basis, see February 1993 Approval 
Order, supra note 3. The discussion in the aforementioned order is 
incorporated by reference into this order.
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    In September 1993, October 1994, and December 1995, the BSE 
submitted to the Commission monitoring reports regarding its amended 
SPEP. The reports describe the BSE's experience with the pilot program 
during 1993, 1994, and the first two review periods of 1995. In terms 
of the overall scope of the SPEP, the Commission continues to believe 
that objective measures, together with a floor broker questionnaire, 
should generate sufficiently detailed information to enable the 
Exchange to make accurate assessments of specialist performance. In 
this regard, the objective criteria have been useful in identifying how 
well specialists carry out certain aspects (i.e., timeliness of 
execution, price improvement and market depth) of their 
responsibilities as specialists.
    The Commission also has reviewed the BSE's experience with its 
minimum adequate performance thresholds. Although it appears that these 
standards have been helpful in identifying some specialists with 
potential performance problems, as well as providing an incentive for 
improved market making performance, the Commission notes that the 
acceptable levels of performance have not been revised since the 
inception of the pilot and, as discussed below, should be reviewed.
    Finally, the Commission continues to believe that, taking the SPEP 
as a whole, most potential performance problems should be brought to 
the attention of the appropriate committee. In terms of the BSE's 
response to the deficiencies it identified, the BSE should examine its 
SPEP to ensure that adequate corrective actions are taken with respect 
to each deficient specialist.
    In conclusion, although the Commission believes the BSE should 
evaluate means to strengthen its performance oversight program, the 
pilot has been a positive first step towards developing a more 
effective SPEP. Accordingly, the Commission believes that it is 
appropriate to extend the current pilot program for an additional 
twelve-month period, expiring December 31, 1996. This twelve-month 
period will allow the Exchange to respond to the Commission's concerns 
about the SPEP, as set forth below. First, the Commission expects the 
BSE to evaluate the incorporation of additional objective criteria, so 
that the Exchange can conduct a thorough analysis of specialist 
performance.\14\ At the same time, the BSE should assess whether each 
measure, as well as the questionnaire, is assigned an appropriate 
weight.\15\ Moreover, the Commission expects the Exchange to conduct an 
on-going examination of its minimum adequate performance thresholds, in 
order to ensure that they continue to be set at appropriate levels. The 
Commission also continues to believe that relative performance rankings 
that subject the bottom 10% of all specialist units to review by an 
Exchange committee are an important part of an effective evaluation 
program. Finally, the BSE should closely monitor the conditions for 
review and should take steps to ensure that all specialists whose 
performance is deficient and/or diverges widely from the best units 
will be subject to meaningful review. In the Commission's opinion, a 
meaningful review process would ensure that adequate corrective actions 
are taken with respect to each deficient specialist. The Commission 
would have difficulty granting permanent approval to a SPEP that did 
not include a satisfactory response to the concerns described above.

    \14\ For example, the BSE could develop additional measures of 
market depth, such as how often the specialist's quote exceeds 500 
shares or how often the BSE quote, in size, is larger than the BBO 
(excluding quotes for 100 shares). Another possible objective 
criteria could measure quote performance (i.e., how often the BSE 
specialist's quote, in price, is alone at or tied with the BBO).
    \15\ In this regard, because of the substantial overlap between 
Turnaround Time and Holding Orders Without Action, the SEC 
recommends that the BSE consider either having only one measure in 
this category (i.e., timeliness of execution) or reducing the 
weights of the existing measures, which together account for 30% of 
the current SPEP.
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    The Commission therefore requests that the BSE submit a report to 
the Commission, by September 16, 1996, describing its experience with 
the pilot. At a minimum, this report should contain data, for the last 
review period of 1995 and the first two review periods of 1996, on (1) 
the number of specialists who fell below acceptable levels of 
performance for each objective measure,\16\ the questionnaire and the 
overall program, and the specific measures in which each such 
specialist was deficient; (2) the number of specialists who, as a 
result of the objective measures, appeared before the PIAC for informal 
counseling; (3) the number of such specialists then referred to the MPC 
and the type of action taken; (4) the number of specialists who, as a 
result of the overall program, appeared before the MPC and the type of 
action taken; (5) the number of specialists who, as a result of the 
questionnaire or falling in the bottom 10% were referred by the 

[[Page 676]]
Exchange staff to the PIAC and the type of action taken (this should 
include the number of specialists then referred to the MPC and the type 
of action taken by that Committee); and (6) a list of stocks 
reallocated due to substandard performance and the particular unit 
involved. The report also should discuss the specific action taken by 
the BSE to develop additional objective measures, revise the minimum 
adequate performance thresholds and the assigned weights for each 
measure, and address the other concerns noted above. Any requests to 
modify this pilot, to extend its effectiveness or to seek permanent 
approval for the SPEP should be submitted to the Commission by 
September 16, 1996, as a proposed rule change pursuant to Section 19(b) 
of the Act.

    \16\ For each objective measure, the SEC also requests that the 
BSE provide the mean and median scores.
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    For the reasons discussed above, the Commission finds that the 
BSE's proposal to extend its SPEP pilot program for an additional 
twelve-month period is consistent with the requirements of Sections 6 
and 11 of the Act and the rules and regulations thereunder applicable 
to a national securities exchange. Specifically, the Commission finds 
that the proposed rule change is consistent with the Section 
6(b)(5)\17\ requirement that the rules of the Exchange be designed to 
promote just and equitable principles of trade, 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.

    \17\ 15 U.S.C. 78f(b)(5).
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    Further, the Commission finds that the proposal is consistent with 
Section 11(b) of the Act \18\ and Rule 11b-1 thereunder \19\ which 
allow securities exchanges to promulgate rules relating to specialists 
in order to maintain fair and orderly markets and to remove impediments 
to and perfect the mechanism of a national market system.

    \18\ 15 U.S.C. 78k(b).
    \19\ 17 CFR 240.11b-1.
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register. This will permit the pilot 
program to continue on an uninterrupted basis and allow the BSE time to 
consider improvements to its program. In addition, the rule change that 
implemented the pilot program was published in the Federal Register for 
the full comment period, and no comments were received.\20\ 
Accordingly, the Commission believes that it is consistent with the Act 
to accelerate approval of the proposed rule change.

    \20\ See February 1993 Approval Order, supra note 3.
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    It is therefore ordered, pursuant to Section 19(b)(2) \21\ that the 
proposed rule change is hereby approved on a pilot basis until December 
31, 1996.

    \21\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\

    \22\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-236 Filed 1-8-96; 8:45 am]
BILLING CODE 8010-01-M