[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