[Federal Register Volume 62, Number 41 (Monday, March 3, 1997)]
[Notices]
[Pages 9470-9472]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5083]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38331; File No. SR-BSE-96-10]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Boston Stock Exchange, Inc. Relating to Amending the
Execution Guarantee Rule and BEACON Rule 5
February 24, 1997.
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 December
1, 1996, 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. The
Exchange also filed Amendment Nos. 1 and 2 on February 14 and 19, 1997,
respectively, the substance of which is incorporated into this
notice.\1\
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\1\ See letters from Karen A. Aluise, Assistant Vice President,
BSE, to Michael Walinskas, Senior Special Counsel, Market
Regulation, Commission, dated February 10, 1997 (``Amendment No.
1'') and February 13, 1997 (``Amendment No. 2'') respectively.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
BSE proposes to amend Chapter II, Section 33, the Execution
Guarantee Rule (``Execution Guarantee Rule''), and Chapter XXXIII,
Section 5, the Boston Exchange Automated Communication Order-Routing
Network (``BEACON System'') Rule (``BEACON Rule 5'').
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 IV below. The self-regulatory organization
has prepared summaries, set forth in Section 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 main purpose of the proposed rule change is to amend certain
provisions of the Execution Guarantee Rule and BEACON Rule 5. The
Execution Guarantee Rule was adopted to provide customers with primary
market price protection on small size orders. The Exchange states that
the guarantee was intended to apply to orders ranging in size from 100
shares up to and including 1,299 shares, regardless of the displayed
bid or offer size at the time. Orders over 1,299 shares were not
intended to receive a partial execution of 1,299 shares, but were to be
handled based on prints in the primary market. The proposed rule change
is designed to clarify that BSE specialists must guarantee execution on
all agency market and marketable limit orders from 100 up to and
including 1,299 shares. The current language of the Execution Guarantee
Rule indicates that this guarantee applies ``regardless of the size of
the order.'' The Exchange is proposing to delete this phrase. The
Exchange states that in drafting the original text of the rule, the
phrase ``regardless of the size of the order'' was incorrectly stated.
The proposed rule change also eliminates the 2,500 execution
guarantee for most actively traded stocks (``MATS'') from the Execution
Guarantee Rule. The Exchange believes that market conditions should
dictate the appropriate execution size for a customer order in a given
trading situation. The Exchange believes that because market conditions
do not always provide a 2,500 share liquidity level in the MATS issues,
it is appropriate to allow natural liquidity level in the MATS issues,
it is appropriate to allow natural liquidity levels to establish price
and size parameters on larger orders. In addition, the Exchange notes
that it has never received a customer complaint regarding the failure
of a specialist to honor the 2,500 share MATS guarantee. The Exchange
believes that this is most likely because customers do not expect or
receive an execution where market conditions do not so warrant and that
because of this the elimination of the MATS requirement from the
execution guarantee will have no impact.
The proposed rule change moves rule text covering the obligation
for filling limit orders from the Interpretations and Policies section
to the body of the Execution Guarantee Rule and labels it as paragraph
(c). The proposed rule change also renumbers and clarifies the
remaining Interpretations and Policies to the Execution Guarantee Rule.
The proposed rule change clarifies proposed Interpretation and Policy
.03 of the Execution Guarantee Rule regarding simultaneous orders to
limit a specialist's obligation to the accumulated displayed national
best bid and offer (``NBBO'') size, where multiple orders are received
in a short period of time, particularly in illiquid stocks. The
Exchange notes that the original language was adopted prior to
electronic order routing and did not anticipate the high volume of
today's electronic trading environment.
The proposed rule change limits the scope of proposed
Interpretation and Policy .04, which says that size will be governed by
the size displayed on the Consolidated Quote System (``CQS''), to limit
order executions. The Exchange states that proposed Interpretation and
Policy .04 is restricted to limit orders because market orders are
already addressed in proposed paragraphs (a) and (b) of the Execution
Guarantee Rule.\2\ The Exchange proposes two
[[Page 9471]]
additional changes to the Execution Guarantee Rule. Proposed
Interpretation and Policy .05, regarding adjustments in execution
price, has been clarified to include all situations where a market
center is experiencing system problems that result in invalid
quotations in CQS, not just those quotations that can be demonstrated
to be in error. Finally, under proposed Interpretation and Policy .06,
specialists can obtain relief from the requirements of the remainder of
the Execution Guarantee Rule \3\ upon approval from three Floor
Officials, rather than the current standard of requiring the approval
of two floor members of the Board of Governors or the Market
Performance committee. The Exchange notes that Floor Officials include
floor members of the Board of Governors. The Exchange states that this
change will provide a larger field from which to seek such relief,
particularly where absence from the floor and conflict of interest are
issues.
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\2\ Proposed paragraph (a) states that specialists will
guarantee execution on all agency market and marketable limit orders
from 100 up to and including 1,299 shares. Proposed paragraph (b)
states that, subject to requirements of the short sale rule, all
agency market orders must be filled on the basis of the CQS best bid
or better on a sell order, or the CQS best offer or better on a buy
order.
\3\ The Commission notes that the proposed Interpretation and
Policy .06 also amends the rule to state that the specialist can now
seek relief from the remainder of the entire Execution Guarantee
Rule, rather than from just the Interpretations and Policies.
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BEACON Rule 5 was adopted to specifically address the function of
the BEACON System on the trading floor. The automatic execution
function in BEACON is designed to aid specialists in the execution of
customer orders. The system performs a price check and will
automatically execute certain qualifying orders without the
intervention of a specialist, except for potential price improvement.
The 1,299 share automatic execution parameter in the current BEACON
Rule 5 was selected based on the size of the execution guarantee
contained in the Execution Guarantee Rule, although higher (2,500
shares) and lower (599 shares) parameters are available in certain
situations.
Current BEACON Rule 5 contains three automatic execution parameters
(2,500; 1,299; 599), referred to as Tiers I, II, and III. However, the
Exchange states that practice has been to only utilize the 1,299
automatic execution parameter of BEACON Rule 5 for automatic execution
and the Execution Guarantee Rule to address price and size of
execution, manual or automatic. As a result, the proposed rule change
to paragraph (a) of BEACON Rule 5 eliminates all references to Tier I,
II and III stocks, thus subjecting all the stocks covered by BEACON
Rule 5 to the 1,299 automatic execution parameter unless they are
specifically exempted under paragraph (b). The proposed rule change to
paragraph (b) of BEACON Rule 5 still allows the specialist to request a
599 automatic execution parameter under certain circumstances and takes
out all references to Tier I and Tier II stocks. In addition, paragraph
(a) still allows specialists to provide automatic execution parameters
larger than the 1,299 minimum requirement.
The Exchange has also proposed certain technical changes to BEACON
Rule 5. The automatic execution parameters will be published in the
BEACON System, but not in hard copy anymore. All references to the word
``guarantee'' will be replaced with ``automatic execution parameters''
or ``parameters'' because hindsight has shown that the use of the word
``guarantee'' in regard to the required automatic execution parameter
in BEACON Rule 5 has been confusing. The proposed rule change also
amends paragraphs (c) and (d) of BEACON Rule 5 to eliminate all
references to the ``BEACON quotation'', which is more closely
associated with the specialist's displayed quotation, and replaces them
with ``BEACON reference price.''
The proposed rule change, in clarifying current paragraph (c) of
BEACON Rule 5, changes the BEACON reference price from the primary
market best bid or offer price to the consolidated best bid or offer
(``BBO'') price. All market and marketable limit orders will be filled
in their entirety, up to the current BEACON Rule 5 automatic execution
parameter, regardless of the displayed size of the consolidated BBO. In
addition, the proposed rule change to paragraph (c) of BEACON Rule 5
eliminates the last sentence of paragraph (c), which refers to bids and
offers superior in price to the BEACON reference price, to reflect the
incorporation of these quotations into the BEACON reference price, by
changing the reference price from the primary market best bid or offer
to the consolidated market best bid or offer.
The Exchange is amending paragraph (d) of BEACON Rule 5 to give
specialists discretion to stop orders, which better expresses the
intent of the rule. The proposed rule change accomplishes this
amendment by replacing ``will be `stopped' '' with ``should be
`stopped'.'' The proposed rule change eliminates both paragraphs (e)
(requiring that ``stopped'' order must be executed by the close of
trading) and (f) (stating that principal orders will not be subject to
the execution guarantee as defined in this section) of BEACON Rule 5
because the requirements are addressed in separate rules. BEACON Rule
1(a) states that only agency orders will be eligible for automatic
execution in the BEACON System.
The Exchange states that this rule change will have no impact on
the members or customers of the Exchange, other than to eliminate
confusing, conflicting and unnecessary provisions of the Execution
Guarantee Rule and BEACON Rule 5. The BEACON System automatic execution
parameters and the Execution guarantee Rule execution guarantee will
remain unchanged.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b)(5) of the Act \4\ in that it is designed to promote
just and equitable principles of trade and to remove impediments to and
perfect the mechanism of a free and open market and 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.
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\4\ 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 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 solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
[[Page 9472]]
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 proposed
rule change between the Commission and any person, other than those
that my 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 Room. 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-96-10 and
should be submitted by March 24, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-5083 Filed 2-28-97; 8:45 am]
BILLING CODE 8010-01-M