[Federal Register Volume 63, Number 174 (Wednesday, September 9, 1998)]
[Notices]
[Pages 48283-48285]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-24095]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40381; File No. SR-BSE-98-05]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Boston 
Stock Exchange, Inc. Relating to the Display of Limit Orders

August 27, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4, thereunder,\2\ notice is hereby given 
that on June 16, 1998, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change. The proposed rule 
change, as amended, is described in Items I and II below, which Items 
have been prepared by the Exchange. The Exchange submitted to the 
Commission Amendment No. 1 to its proposed rule change on July 16, 
1998,\3\ Amendment No. 2 to its proposal on August 6, 1998,\4\ and 
Amendment No. 3 on August 17, 1998.\5\ The Commission is publishing 
this notice and order to solicit comments on the proposed rule change 
from interested persons and to grant accelerated approval of the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange generally made technical 
changes to the Exchange's proposed rule and interpretive guidance. 
See Revised Rule Filing, received July 16, 1998 (``Amendment No. 
1'').
    \4\ In Amendment No. 2, the Exchange generally made technical 
changes to the Exchange's proposed rule and interpretive guidance. 
See Letter from George W. Mann, Jr., Senior Vice President and 
General Counsel, Exchange, to Terri Evans, Attorney, Division of 
Market Regulation (``Division''), SEC, dated August 3, 1998 
(``Amendment No. 2'').
    \5\ In Amendment No. 3, the Exchange generally made technical 
changes to the Exchange's interpretive guidance. See Letter from 
George W. Mann, Jr., Senior Vice President and General Counsel, 
Exchange, to Terri Evans, Attorney, Division, SEC, dated August 13, 
1998 (``Amendment No. 3'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange seeks to incorporate the provisions of SEC Rule 11Ac1-
4,\6\ Display of Customer Limit Orders, and interpretations thereto, 
into the Exchange rules to assist members and staff in ensuring 
compliance with its provisions. Proposed new language is italicized.
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    \6\ 17 CFR 240.11Ac1-4.
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Chapter II

Dealings on the Exchange

* * * * *

Limit Order Display Rule

    Sec. 40. All customer Limit Orders shall be immediately (defined as 
no later than 30 seconds) displayed upon receipt, unless specifically 
exempted under SEC Rule 11Ac1-4 of the Securities Exchange Act of 1934.
    (a) More specifically, SEC Rule 11Ac1-4 provides that a specialist 
must, under normal market conditions, ``immediately'' (i.e., no later 
than 30 seconds) display such order in the bid or offer that reflects:
    (i) the price and the full size of each customer limit order held 
by the specialist that is at a price that would improve the bid or 
offer price displayed by such specialist in such security; and
    (ii) the full size of each customer limit order held by the 
specialist that:
    (A) is priced equal to the bid or offer of such specialist for such 
security;
    (B) is priced equal to the national best bid or offer; and
    (C) represents more than a de minimus change in relation to the 
size associated with the specialist's bid or offer (more than 10% of 
the current quote size--must aggregate de minimus orders in calculating 
10%).
    (b) Exceptions. The requirements in paragraphs (i) and (ii) above 
shall not apply to any customer limit order:
    (i) that is executed upon receipt of the order;
    (ii) that is placed by a customer who expressly requests, either at 
the time that the order is placed or prior thereto, pursuant to an 
individually negotiated agreement with respect to such customer's 
orders, that the order not be displayed;
    (iii) that is an odd-lot order;

[[Page 48284]]

    (iv) that is a block size order (10,000 shares or more or a market 
value of $200,000 or more), unless a customer placing such order 
requests that the order be displayed (block size limit order--may 
accumulate partial executions and go below 10,000 shares without 
required display based on original block size exception);
    (v) that is delivered immediately upon receipt to an exchange or 
association-sponsored system, or an electronic communications network 
that complies with the requirements of SEC Rule 11Ac1-1(c)(5)(ii) with 
respect to that order;
    (vi) that is delivered immediately upon receipt to another exchange 
member that complies with the requirements of this section with respect 
to that order; or
    (vii) that is an ``all or none'' order.

Interpretations:

    (i) A customer short sale limit, if such display would cause an 
execution on a minus or zero-minus tick, should not be displayed.
    (ii) BSE sole-listed issues are exempted.
    (iii) ``Marker'' orders are permissible for those limit orders that 
qualify for an exception to SEC Rule 11Ac1-4.
    (iv) A specialist may send a partial ``marker'' only with explicit 
customer authorization.
    (v) The limit order display does not require a specialist to 
immediately display an order that would lock or cross the market. 
However, the specialist, if after using reasonable and efficient means, 
attempted but was unable to trade with the displayed market, the limit 
order must be displayed even if it locks or crosses the market.

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 Exchange 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 III below. The Exchange has prepared summaries, set forth in 
sections 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 purpose of the proposed rule change is to incorporate the 
provisions of the SEC Limit Order Display Rule into the Exchange rules 
for members' ease of reference, clarification and interpretation. The 
Rule is almost a verbatim copy of the relevant portions of SEC Rule 
11Ac1-4.\7\
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    \7\ 17 CFR 240.11Ac1-4.
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    Additional interpretive sections (taken from SEC letters giving 
guidance on the order handling rules) \8\ discuss further relief from 
the display requirements in certain situations, such as where the 
display of a customer short sale limit order would result in an 
execution on a minus or zero-minus tick; in all Exchange sole listed 
securities; where an attempt has been made to reach another market 
through a ``marker'' order and the quote is inaccessible, where a 
customer authorized partial marker order has been sent; and where the 
display of a limit order would result in a locked or crossed market.
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    \8\ See letters from Richard R. Lindsey, Director, Division, SEC 
to Richard Grasso, Chairman and Chief Executive Officer, New York 
Stock Exchange, Inc. (``NYSE''), dated November 22, 1996, and to 
Richard G. Ketchum, Chief Operating Officer, National Association of 
Securities Dealers, Inc., dated January 3, 1997 (collectively 
``Interpretation Letters'').
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2. Statutory Basis
    The statutory basis for the proposed rule change in Section 6(b)(5) 
of the Act,\9\ in that the proposed rule change is designed to promote 
just and equitable principles of trade and to protect investors and the 
public interest by ensuring that all limit orders are reflected in a 
timely and accurate manner.
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    \9\ 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 burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 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 in the 
Commission's Public Reference Room in Washington, DC. 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-98-05 and should be submitted by September 30, 1998.

IV. Commission's Findings and Order Granting Accelerated Approval 
of the Proposed Rule Change

    The Commission believes that the Exchange's proposal to adopt a 
limit order display rule is consistent with the policies behind the 
Commission's own Limit Order Display Rule.\10\ The Commission 
recognizes that the Exchange's proposal is substantially similar to the 
Commission's own Limit Order Display Rule. The Commission also 
recognizes that the Exchange's proposal summarizes and incorporates 
interpretations of the Limit Order Display Rule issued by the 
Commission staff.\11\ The Commission notes, however, that the 
Exchange's interpretations are merely summaries of guidance issued by 
the Commission staff and that reference should be made to the 
Commission's release adopting the Limit Order Display Rule \12\ and the 
Interpretation Letters for full interpretive guidance on the 
Commission's Limit Order Display Rule. For instance, to understand 
fully the exceptions to the Limit Order Display Rule regarding 
``marker'' orders, which are discussed in the Exchange's 
Interpretations (iii) and (iv), you must reference the Interpretation 
Letter to the NYSE.\13\
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    \10\ See Securities Exchange Act Release No. 37619A (September 
6, 1996), 61 FR 48290 (September 12, 1996).
    \11\ See Interpretation Letters, supra note 8.
    \12\ See Release No. 37619A, supra note 10.
    \13\ See Letter to Richard Grasso, supra note 8.
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    With respect to the foregoing, the staff has opined that an 
exchange specialist

[[Page 48285]]

may route its own order, rather than a customer order, to another 
market if the specialist's own order fully reflects the terms of the 
customer limit order, the order is displayed (or executed) by the other 
market, consistent with the Limit Order Display Rule, and any 
execution, in whole or in part, is passed on to the customer limit 
order. An exchange specialist order for less than the full size of the 
customer limit order would not be deemed to reflect the terms of the 
customer limit order. As a result, sending such an order to another 
market or market maker for display would not satisfy the Limit Order 
Display Rule. Using a market order not for the full size of the 
customer limit order would be permissible, however, if the customer had 
authorized the exchange specialist to use discretion in determining 
whether to display the order, or had requested that only the number of 
shares represented by the market order be displayed, consistent with 
the exception contained in the Limit Order Display Rule for customer 
consent.\14\
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    \14\ See Letter to Richard Grasso, supra note 8 and rule 11Ac1-
4(c)(2) under the Act.
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    In addition to summarizing and incorporating interpretive guidance 
issued by the Commission staff, the Exchange also has interpreted the 
Commission Limit Order Display Rule as exempting Exchange solely listed 
issues.\15\ While the Commission has never explicitly recognized this 
exemption from the Limited Order Display Rule, the Commission believes 
that, under the current circumstances, this interpretation is 
reasonable. The Commission notes that any interpretative guidance 
issued by the Commission staff is subject to modification at any time 
if the Commission or its staff determines that such action is necessary 
or appropriate. The Commission emphasizes that the Exchange specialists 
must comply with the Commission's rules and interpretations, 
notwithstanding the incorporation of prior Commission staff guidance in 
the Exchange's rule.
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    \15\ The Exchange reasoned that because the BSE solely listed 
issues are not reported pursuant to an effective transaction 
reporting plan, they are not reported securities as defined in Rule 
11Ac1-1(a)(20) under the Act.
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    The Commission believes that the Exchange's proposal is consistent 
with Section 6 of the Act.\16\ Specifically, the Commission believes 
the proposal is consistent with Section 6(b)(5) of the Act,\17\ which 
requires an exchange to have rules designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, 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. In particular, 
the Commission believes that by incorporating the Commission's Limit 
Order Display Rule and the Commission staff's interpretive guidance 
regarding that rule into the Exchange's own rule the proposal should 
facilitate compliance with the Limit Order Display Rule by Exchange 
members by raising member awareness of the Commission rule and how the 
rule applies to Exchange members.
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    \16\ In reviewing this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78f.
    \17\ 15 U.S.C. 78f(b)(5).
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    The Exchange has requested that the Commission approve the proposal 
prior to the thirtieth day after the date of publication of notice of 
the proposal in the Federal Register. Because the Commission believes 
the proposal clarifies and restates Commission requirements that 
already apply to all Exchange members and may facilitate compliance by 
making the rules and guidance more accessible to Exchange members, the 
Commission finds good cause for approving the proposed rule change (SR-
BSE-98-05) prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change be, and hereby is, approved on 
an accelerated basis.

    \18\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-24095 Filed 9-8-98; 8:45 am]
BILLING CODE 8010-01-M