[Federal Register Volume 62, Number 95 (Friday, May 16, 1997)]
[Notices]
[Pages 27080-27083]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12890]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38614; File No. SR-BSE-96-10]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change and Notice of Filing and Order Granting 
Accelerated Approval to Amendment Nos. 3 and 4 to Proposed Rule Change 
by the Boston Stock Exchange, Inc., To Amend the Execution Guarantee 
Rule and BEACON Rule 5

May 12, 1997.

I. Introduction

    On December 1, 1997,\1\ the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'')\2\ and Rule 19b-4 thereunder,\3\ a 
proposed rule change 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'').
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    \1\ The Exchange also filed Amendment Nos. 1 and 2 on February 
14, 1997 and February 19, 1997, respectively, the substance of which 
was incorporated into the notice. 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.
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
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    The proposed rule change, including Amendment Nos. 1 and 2, was 
published for comment in Securities Exchange Act Release No. 38331 
(February 24, 1997), 62 FR 9470 (March 3, 1997). No comment letters 
were received on the proposal. The Exchange subsequently filed 
Amendment Nos. 3 and 4 to the proposed rule change on March 26, 1997 
and April 7, 1997, respectively.\4\
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    \4\ Amendment No. 3 amends proposed Interpretation and Policy 
.05 to the Execution Guarantee Rule to state that an adjustment in 
price may be allowed if the displayed quotations of the Consolidated 
Quote System (``CQS'') can be demonstrated to be in error or a 
market center is experiencing system problems which result in an 
invalid quotation in CQS. Amendment No. 4 amends proposed 
Interpretation and Policy .06 to state that specialists can seek 
relief from the requirements of the Execution Guarantee Rule from 
two out of three floor officials, and specifies that floor officials 
include floor members of the Board of Governors and the Market 
Performance Committee. See letters from Karen A. Aluise, Assistant 
Vice President, BSE, to Michael Walinskas, Senior Special Counsel, 
Market Regulation, Commission, dated March 20, 1997 (``Amendment No. 
3'') and April 4, 1997 (``Amendment No. 4''), respectively.
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II. Background and Description

    The BSE proposes to amend certain provisions of the Execution 
Guarantee Rule and BEACON Rule 5. The Execution Guarantee Rule provides 
customers with primary market price protection on small size orders 
ranging in size from 100 shares up to and including 1,299 shares, 
regardless of the displayed bid or offer size in the primary market at 
the time the order is entered. The proposed rule change deletes the 
current language of the Execution Guarantee Rule that indicates that 
the 1,299 share guarantee applies ``regardless of the size of the 
order.'' The proposed rule change now states that BSE specialists must 
guarantee execution on all agency market and marketable limit orders 
from 100 up to and including 1,299 shares.
    The proposed rule change also eliminates the 2,500 execution 
guarantee for most actively traded stocks (``MATS'') from the Execution 
Guarantee Rule. 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 to limit a specialist's 
obligation for simultaneous orders to the accumulated displayed 
national best bid and offer (``NBBO'') size. Under proposed 
Interpretation and Policy .04, the size of limit order executions will 
be governed by the size displayed on the Consolidated Quote System 
(``CQS''). Amendment No. 3 amends proposed Interpretation and Policy 
.05 to state an adjustment in execution price may be allowed (as 
prescribed in proposed Interpretation and Policy .06) if the displayed 
quotations of the CQS can be shown to be in error or a market center is 
experiencing system problems that result in invalid quotations in CQS. 
Finally, under proposed Interpretation and Policy .06, as amended by 
Amendment No. 4, specialists can obtain relief from the requirements of 
the remainder of the Execution Guarantee Rule \5\ upon approval from

[[Page 27081]]

two out of 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. Floor officials include floor 
members of the Board of Governors and the Market Performance 
Committee.\6\
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    \5\ 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.
    \6\ See Amendment No. 4.
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    BEACON Rule 5 addresses the function of the BEACON System on the 
trading floor. The automatic execution function in BEACON aids 
specialists in the execution of customer orders. The system performs a 
price check and automatically executes certain qualifying orders 
without the intervention of a specialist, except for potential price 
improvement and the fact that the specialist must stop orders that 
would be outside the primary market price range for the day, under 
current BEACON Rule 5. The 1,299 share automatic execution parameter in 
the current BEACON Rule 5 is the same size as the execution guarantee 
contained in the Execution Guarantee Rule, although higher (2,500 
shares) and lower (599 shares) parameters are available in BEACON in 
certain situations.
    Current BEACON Rule 5 contains three automatic execution 
parameters; 2,500 shares, 1,299 shares (Tier I), and 599 shares (Tier 
II). The proposed rule change to paragraph (a) of BEACON Rule 5 
eliminates all references to Tier I and II stocks, effectively 
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, which also eliminates all references to Tier I and Tier 
II stocks, still allows the specialist to request a 599 automatic 
execution parameter under certain circumstances. 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. Members will still have access to review the automatic 
execution parameters, which will be published on the System but will 
not be published in hard copy anymore, as is currently done. All 
references to the word ``guarantee'' will be replaced with ``automatic 
execution parameters'' or ``parameters.'' The proposed rule change also 
amends paragraphs (c) and (d) of BEACON Rule 5 to eliminate all 
references to the ``BEACON quotation'' and replaces them with ``BEACON 
reference price.''
    The proposed rule change to 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 (``CQ/BBO'') price. All 
market and marketable limit orders will be filled in their entirety, up 
to the BEACON Rule 5 automatic execution parameter, regardless of the 
displayed size of the CQ/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.
    The proposed rule change also amends paragraph (d) of BEACON Rule 5 
to give specialists discretion to stop orders that would be executed 
outside the primary market price range for the day, by replacing ``will 
be `stopped' '' with ``should be `stopped'.'' The proposed rule change 
eliminates both paragraphs (e) (requiring that ``stopped'' orders 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.

III. Discussion

    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)(5).\7\ Specifically, 
the Commission believes that the proposed rule change 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 
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. Accordingly, as 
discussed below, the rule proposal is consistent with the requirements 
of Section 6(b)(5) that Exchange rules facilitate transactions in 
securities while continuing to further investor protection and the 
public interest.\8\
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    \7\ 15 U.S.C. 78f(b)(5).
    \8\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    The Commission believes that the proposed rule change to the 
Execution Guarantee Rule that deletes the ``regardless of the size of 
the order'' language from the execution guarantee, thereby stating that 
the guarantee applies to all agency market and marketable limit orders 
from 100 up to and including 1,299 shares, is consistent with the Act. 
The Commission notes that the Exchange has stated that the Execution 
Guarantee Rule provides customers with primary market price protection 
on small size orders and that orders over 1,299 shares were not 
originally intended to receive a partial execution of 1,299 shares, but 
were to be handled, consistent with best execution obligations, based 
on prints in the primary market. The Commission believes that this 
portion of the proposed rule change ensures the protection of investors 
and the public interest by continuing to require on the BSE an 
execution guarantee for orders up to 1,299 shares. The Commission notes 
that for orders greater than 1,299 shares, members must continue to 
satisfy the applicable best execution obligations, thereby ensuring 
appropriate handling of such orders.
    The Commission believes that the proposed rule change eliminating 
the MATS 2,500 guarantee from the Execution Guarantee Rule is 
consistent with the Act. The Commission notes that there is no 
requirement under the federal securities laws that BSE guarantee a 
particular level of execution of shares. BSE previously instituted the 
MATS guarantee in order to compete more effectively for small order 
business and attract order flow;\9\ however, it has now determined that 
the MATS guarantee is no longer desirable. The Commission believes that 
the MATS guarantee is not necessary to ensure an acceptable quality of 
market depth and liquidity on the BSE, particularly since the Execution 
Guarantee Rule retains a guarantee on all market and marketable limit 
orders from 100 up to and including 1,299 shares. Moreover, the 
Commission notes that the specialists' best execution obligations 
should serve to ensure proper execution of transactions formerly 
subject to the MATS guarantee.
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    \9\ See Securities Exchange Act Release No. 20029 (August 1, 
1983), 48 FR 36043 (August 8, 1983).
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    The Commission believes that the changes to the Interpretations and 
Policies section of the Execution Guarantee Rule are consistent with 
the Act because they should facilitate the trading of securities in a 
free and open market, while continuing to protect investors and serve 
the public interest. The Commission notes that the original language of 
Interpretation and Policy .03, regarding simultaneous orders, was 
adopted prior to electronic order routing and was not designed to 
address the potentially high volume of today's electronic trading 
environment. The

[[Page 27082]]

Commission believes that when multiple orders are received in a short 
period of time, particularly in illiquid stocks, it is appropriate to 
limit a specialist's obligation to the NBBO size. The Commission 
believes that such a limit will serve to protect the specialist by 
limiting their exposure, while at the same time continuing to ensure 
that customers receive the best price that is available in the 
intermarket system in the stock, up to the accumulated NBBO size.
    The Commission notes that proposed Interpretation and Policy .04 of 
the Execution Guarantee Rule now explicitly addresses limit order size 
only; the size of limit orders will be governed by the size displayed 
on the CQS. The proposed rule change restricts this Interpretation and 
Policy to limit orders because treatment of market order and marketable 
limit order size is separately addressed in proposed paragraph (a) of 
the Execution Guarantee Rule.\10\ The Commission also notes that the 
guaranteed price of market orders is governed by the CQS/BBO, under 
paragraph (b) of the Execution Guarantee Rule, and that marketable 
limit orders are in effect also governed by the CQS/BBO since they are 
limit orders whose stated limit price equals the market price when the 
orders are entered.
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    \10\ Under the proposed rule change to the Execution Guarantee 
Rule, specialists must now guarantee execution on all agency market 
and marketable limit orders from 100 up to and including 1,299 
shares.
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    Under Amendment No. 3, the Exchange will now be able to adjust the 
execution price of trades in all situations where another market center 
is experiencing system problems of any kind that result in an invalid 
quotation in CQS or if the displayed CQS quotations can be demonstrated 
to be in error. The Commission notes that this change to proposed 
Interpretation and Policy .05 is intended to broaden the range of 
instances when the Exchange can adjust the execution price, and that 
this change should serve to protect both investors and the specialists 
by ensuring that the Exchange will have the ability to remedy incorrect 
prices whenever they occur.
    Under the proposed rule change to Interpretation and Policy 
.06,\11\ specialists can now obtain relief from the requirements of the 
Execution Guarantee Rule upon approval of two out of three Floor 
Officials, rather than the current standard of two floor members of the 
Board of Governors or the Market Performance Committee. The Commission 
notes that Floor Officials include floor members of the Board of 
Governors and the Market Performance Committee.\12\ Under the proposed 
rule change, specialists would need the approval of two out of the 
first three floor officials they ask.\13\ The Commission believes that 
this change provides a clear standard that prevents specialists from 
lobbying numerous floor officials until they find two who agree with 
their point of view. The Commission also believes that this change 
should provide a tie-breaker in the instance that two floor officials 
do not agree with each other.
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    \11\ See Amendment No. 4, supra note 4.
    \12\ See Amendment No. 4, supra note 4.
    \13\ Phone conversation between Karen A. Aluise, Assistant Vice 
President, BSE, and Heather Seidel, Attorney, Market Regulation, 
Commission, on April 4, 1997.
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    The Commission believes that the proposed rule change to paragraph 
(a) of BEACON Rule 5, which eliminates all references to Tier I and II 
stocks, thereby subjecting all BEACON stocks to a 1,299 automatic 
execution parameter, is consistent with the Act. The change should aid 
specialists in the execution of customer orders and help the BEACON 
System function more efficiently because the standard 1,299 BEACON 
automatic execution parameter now equals the standard 1,299 execution 
guarantee. The Commission notes that a specialist may provide a lower 
(599 shares) or higher execution parameter. The Commission believes 
that this change to BEACON Rule 5 will continue to adequately serve the 
needs of investors. Particularly, the standard 1,299 automatic 
execution parameter provides an adequate measure of depth for automatic 
executions. Although a specialist can request a lower automatic 
execution parameter of 599 shares, the Commission notes that the 
Exchange can only grant such a request upon a showing of good cause. 
The Commission believes that this change is not substantive because 
under current BEACON Rule 5 all BEACON stocks are subject to the 1,299 
guarantee unless they are exempted and guaranteed a 599 parameter, 
which is only granted for good cause shown, or are guaranteed a higher 
2,500 parameter for stocks identified by specialists. The proposed 
change eliminates the labels on the different automatic execution 
parameters but retains the ability of the specialist to request and 
receive a 599 exemption or to provide a guarantee higher than the 1,299 
parameter.\14\
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    \14\ The proposed rule change also makes certain technical 
changes to BEACON Rule 5. All references to the word ``guarantee'' 
will be replaced with ``automatic execution parameters'' or 
``parameters'' because the Exchange believes 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 the 
Exchange believes is more closely associated with the specialist's 
displayed quotation, and replaces them with ``BEACON reference 
price.''
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    The proposed rule change to paragraph (c) of BEACON Rule 5 changes 
the BEACON reference price from the primary market best bid or offer to 
the consolidated market best bid or offer (``BBO''). The Commission 
notes that the proposed rule change eliminating the last sentence of 
paragraph (c) of BEACON Rule 5, which refers to bids and offers 
superior in price to the BEACON reference price, reflects the 
incorporation of these quotations into the BEACON reference price by 
the changing of the reference price from the primary market BBO to the 
consolidated BBO. The Commission believes that this change in the 
reference price should ensure that investors obtain a better execution 
price for their trades because specialists would be executing trades at 
the best price available in the entire intermarket system, instead of 
merely the primary market price.
    The Exchange believes that the proposed rule change to paragraph 
(d) of BEACON Rule 5, to give specialists discretion to stop orders 
that would be executed outside the primary market price range for the 
day, is consistent with the Act. The Commission notes that there is no 
requirement that the specialist must stop the stock under such 
circumstances and believes that allowing discretion will not negatively 
impact on the best execution obligation of the specialist.\15\
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    \15\ The Commission notes that the Exchange is eliminating 
BEACON Rule 5(e) because Chapter II, Section 38(d), the BSE's 
stopping stock rule, states that all orders stopped pursuant to that 
section shall be executed by the end of the trading day on which the 
order was stopped; and that the Exchange is eliminating BEACON Rule 
5(f) because BEACON Rule 1(a) states that only agency orders will be 
eligible for automatic execution in the BEACON System.
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    The Commission finds good cause to approve Amendment Nos. 3 and 4 
to the proposed rule change prior to the thirtieth day after the date 
of publication of notice of filing thereof in the Federal Register. As 
noted above, Amendment No. 3 amends proposed Interpretation and Policy 
.05 to the Execution Guarantee Rule to state that an adjustment in 
price may be allowed if the displayed quotations of the CQS can be 
demonstrated to be in error or a market center is experiencing system 
problems which result in an invalid quotation in CQS. By broadening the

[[Page 27083]]

range of instances where the Exchange can adjust the execution price, 
Amendment No. 3 should continue to help protect specialists and 
investors and the public interest by ensuring that the Exchange has the 
ability to remedy erroneous prices whenever they occur. Amendment No. 4 
amends proposed Interpretation and Policy .06 to the Execution 
Guarantee Rule to state that a specialist who wants to receive relief 
from the requirements of the Execution Guarantee Rule must obtain the 
approval of two out of three floor officials, and specifies that floor 
officials include floor members of the Board of Governors and the 
Market Performance Committee. Amendment No. 4 will prohibit ``forum 
shopping'' among floor officials and will provide a tie-breaker in the 
situations where two floor officials disagree. Accordingly, the 
Commission believes that it is consistent with Section 6(b)(5) of the 
Act to approve Amendment Nos. 3 and 4 to the proposal on an accelerated 
basis.
    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 3 and 4 to the rule proposal. 
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 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 Room. Copies of such filing also will 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 June 6, 1997.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-BSE-96-10), including 
Amendment Nos. 3 and 4, is approved.

    \16\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-12890 Filed 5-15-97; 8:45 am]
BILLING CODE 8010-01-M