[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