[Federal Register Volume 63, Number 81 (Tuesday, April 28, 1998)]
[Notices]
[Pages 23307-23309]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-11167]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39890; File No. SR-BSE-97-04]


Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Order 
Approving a Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval to Amendment No. 2 Thereto Relating to 
Stop Orders and Stop Limit Orders in Solely Listed Issues

April 20, 1998.
    On September 4, 1997, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act

[[Page 23308]]

of 1934 (``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ 
a proposed rule change to adopt a new Supplementary Material to Section 
3 of Chapter 1 of the Exchange Rules of govern the activation criteria 
for stop orders and stop limit orders in sole listed issues where the 
triggering executions do not occur on the Exchange. The Exchange 
subsequently filed Amendment No. 1 to the proposed rule change on 
September 15, 1997.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 revised the text of the proposed 
Supplementary Material to Section 3 of Chapter 1 of the Exchange 
Rules to clarify that it only applies to the trading of issues 
listed solely on the Exchange and that the proposal also applies to 
stop limit orders. See letter from Karen A. Aluise, Assistant Vice 
President, BSE, to Michael Walinskas, Senior Special Counsel, 
Division of Market Regulation, SEC (September 15, 1997) (``Amendment 
No. 1'').
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    The proposed rule change, including Amendment No. 1, was published 
for comment in the Federal Register on October 8, 1997.\4\ No comments 
were received on the proposal. The Exchange subsequently filed 
Amendment No. 2 to the proposed rule change on November 7, 1997.\5\ 
This order approves the proposal, as amended.
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    \4\ Exchange Act Release No. 39187 (Oct. 1, 1997), 65 FR 52601.
    \5\ Amendment No. 2 clarified that the Exchange uses the term 
``Nasdaq'' to include Nasdaq/NMS or Nasdaq Small Cap markets, but 
not to include the OTC Bulletin Board. Accordingly, stop orders and 
stop limit orders for issues listed solely on the Exchange, but that 
are also traded through Nasdaq/NMS or the Nasdaq Small Cap market, 
may be triggered based on trades occurring through Nasdaq/NMS or the 
Nasdaq Small Cap market. See letter from Karen A. Aluise, Vice 
President, BSE, to Michael Walinskas, Senior Special Counsel, 
Division of Market Regulation, SEC (November 7, 1997) (``Amendment 
No. 2'').
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    The BSE is proposing to adopt a new Supplementary Material to guide 
Exchange specialists and customers in the appropriate activation stop 
orders and stop limit orders in sole listed issues. Due to the 
frequency with which the Exchange's sole listed issues trade through 
Nasdaq,\6\ it is likely that transactions will occur in that market at 
prices which would activate Exchange-resident stop orders and stop 
limit orders, were such transactions to occur in the Exchange's market. 
At such times, customers may look for an execution report based on 
trading that occurs through Nasdaq. In these circumstances, Exchange 
specialists may be placed at significant market risk if a customer is 
permitted to determine after the fact that a stop order or stop limit 
order in a sole listed issue was, or was not, due based on a sale 
reported in the Nasdaq market.
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    \6\ As noted above, the Exchange uses the term ``Nasdaq'' to 
include both the Nasdaq/NMS and Nasdaq Small Cap markets. However, 
the term is not intended to include the OTC Bulletin Board. See 
Amendment No. 2.
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    The Exchange proposes to adopt this new interpretation to remove 
any ambiguity regarding the appropriate activation of stop orders and 
stop limit orders in sole listed issues by necessitating the inclusion 
of reported regular way round-lot Nasdaq sales in determining the 
activation of Exchange-resident stop orders and stop limit orders in 
sole listed issues. Under the proposed rule, a customer's stop or stop 
limit order for a BSE sole listed security will be triggered upon a 
round-lot sales transaction at or through the stop price that is 
executed either on the Exchange or through Nasdaq. Once triggered, a 
stop order to buy or sell will become a market order executable at the 
most advantageous price obtainable after the order is represented at 
the specialist's post. A customer's triggered stop order generally will 
be executed at the best available price, including the best Nasdaq 
price. The actual execution of the order will occur on the Exchange 
under all circumstances.\7\ Exchange-resident stop limit orders will be 
triggered in a manner identical to stop orders (i.e., the occurrence of 
a round-lot transaction at or through the stop price on the Exchange or 
through Nasdaq).\8\ Once triggered, a stop limit order to buy or sell 
will become a marketable order executable at the limit price or better, 
if obtainable, after the order is represented at the specialist's post. 
Similar to the treatment of stop orders, Nasdaq prices will be utilized 
to determine the best available price.
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    \7\ Telephone conversation between Karen Aluise, Vice President, 
BSE, and Christine Richardson, Attorney, SEC, March 13, 1998.
    \8\ In the case of stop limit orders, the Exchange permits the 
stop price and the limit price to be different. Id.
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    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).\9\ Specifically, the 
Commission believes the proposal is consistent with the Section 6(b)(5) 
\10\ requirements that the rules of an exchange be designed to promote 
just and equitable principles of trade, to prevent fraudulent and 
manipulative acts, and, in general, to protect investors and the public 
interest.\11\
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ In approving this rule, the Commission 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 is 
appropriate in that it promotes further linkage between the regulated 
U.S. equities markets and ensures that a customer's stop or stop limit 
order will be triggered upon the sooner to occur of an appropriate 
execution on the Exchange or through Nasdaq. This additional linkage is 
consistent with the principals contained in Section 11A of the Exchange 
Act and reflects the Congressional intent of creating a national market 
system for securities.\12\ The Commission also believes that the 
proposed rule change helps to assure the best execution of customer 
orders, and is consistent with the maintenance of fair and orderly 
markets by ensuring that a customer's stop or stop limit order will be 
triggered based upon transactions occurring on either the Exchange or 
Nasdaq.\13\
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    \12\ See Section 11A(a)(1), of the Exchange Act, 15 U.S.C. 78k-
1. In addition to the goals set out in Section 11A, Congress also 
found that the linking of qualified securities markets through 
communication and data processing facilities will foster efficiency; 
enhance competition; increase the information available to brokers, 
dealers, and investors; facilitate the offsetting of investors' 
orders and contribute to best execution of such orders. See Market 
2000: An Examination of Current Equity Market Developments, Division 
of Market Regulation, Commission, January 1994, III-4 (``Market 2000 
Study'').
    \13\ See Market 2000 Study, supra note 10, at V-2.
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    The Commission notes that the inclusion of the Nasdaq/NMS and 
Nasdaq Small Cap trades in determining when to activate stop and stop 
limit orders is likely to result in quicker executions of these orders 
on the BSE. The Commission also believes that by including Nasdaq/NMS 
and Nasdaq Small Cap transactions in the activation criteria of 
Exchange resident stop and stop limit orders in BSE solely listed 
issues, the proposed rule change clarifies any ambiguity under the 
Exchange's existing rules as to when these orders will become 
marketable. The Commission also notes that the Exchange has proposed 
adequate surveillance procedures to monitor the activation and 
execution of stop and stop limit orders based on Nasdaq/NMS and Nasdaq 
Small Cap transactions.
    The Commission finds good cause for approving Amendment No. 2 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register. Amendment No. 2 
narrows the scope of the proposal by clarifying that stop and stop 
limit orders on the Exchange may be triggered only by transactions 
occurring in the Nasdaq/NMS and Nasdaq Small Cap markets, and not 
transactions occurring on the

[[Page 23309]]

OTC Bulletin Board. The Commission also notes that no comments were 
received on the original BSE proposal, which was subject to the full 
21-day comment period. Therefore, the Commission believes that is 
consistent with Section 6(b)(5) of the Act to approve Amendment No. 2 
to the proposed rule change on an accelerated basis.
    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2 to the proposed rule change, 
including whether the amendment is consistent with the Act. 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 will also be available for 
inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-BSE-97-04 and should be 
submitted by May 19, 1998.
    For the foregoing reasons, the Commission finds that BSE's 
proposal, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-BSE-97-04) is approved.

    \14\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-11167 Filed 4-27-98; 8:45 am]
BILLING CODE 8010-01-M