[Federal Register Volume 63, Number 238 (Friday, December 11, 1998)]
[Notices]
[Pages 68490-68493]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32963]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40746; File No. SR-BSE-98-7]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 by the Boston Stock Exchange, Inc. Relating 
to its Specialist Performance Evaluation Program

December 3, 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 October 8, 1998, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change. The Exchange submitted 
Amendment No. 1 to its proposal on November 13, 1998.\3\ The proposed 
rule change, as amended, is described in Items I, II, and III below, 
which Items have been prepared by the Exchange. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange seeks permanent approval of 
the Specialist Performance Evaluation Program and deletes its 
request for accelerated approval and retroactive implementation of 
the proposed rule change. See Rule 19b-4 filing, SR-BSE-98-07 (Am. 
1), dated November 6, 1998 (``Amendment No. 1'').
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend the depth measure calculations in 
its Specialist Performance Evaluation Program pilot program (``SPEP'') 
and to seek permanent approval of the program at the expiration of the 
pilot on December 31, 1998.\4\ The text of the proposed rule change is 
as follows: new text is italicized and deleted text is bracketed.
---------------------------------------------------------------------------

    \4\ Id.
---------------------------------------------------------------------------

Chapter XV

Specialists

Specialist Performance Evaluation Program

* * * * *
    Sec. 17(c)(iii) Exceptions. Where Specialists have threshold scores 
in each measure at the following levels (subject to change pursuant to 
Commission approval), they will be deemed to have adequately performed:

    Overall Evaluation Score--at or above weighted score of [5.00] 
7.00
    Turnaround Time--below 21.0 seconds (5 points)(5%)
    Holding Orders Without Action--below 21.0% (5 points)(5%)
    Price Improvement in <8th Markets--at or above 2.0% (5 
points)(20%)
    Price Improvement in 8th Markets--at or above 15.0% (5 
points)(15%)
    Price Improvement in>8th Markets--at or above 25.0% (5 
points)(15%)
    Combined Depth (10 points) (40%)
    (a) Depth--at or above 75.0% [(5 points)(20%)]
    (b) Added Depth--at or above 1.0% [(5 points)(20%)]
* * * * *

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 IV 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 Exchange seeks to amend its SPEP pilot by modifying the two 
depth measure calculations and the overall program score. All other 
aspects of the pilot program will remain the same. In addition, the 
Exchange is requesting permanent approval of the program, which has 
been in effect since 1992 \5\ with periodic modification over the 
years.\6\ The Exchange believes that the SPEP is an effective tool for 
measuring specialist performance if continuously monitored and modified 
to meet the changing needs of the industry and the types of business 
sent to the Exchange, as well as changes in technology. The current 
pilot program will expire on December 31, 1998.
---------------------------------------------------------------------------

    \5\ The Commission initially approved the SPEP in Securities 
Exchange Act Release No. 22993 (March 10, 1986), 51 FR 8298 (March 
14, 1986). The BSE was permitted to incorporate objective measures 
of specialist performance into its pilot program in Securities 
Exchange Act Release No. 31890 (Feb. 19, 1993), 58 FR 11647 (Feb. 
26, 1993), at which point the initial pilot program ceased to exist 
as a separate program.
    \6\ See Amendment No. 1, supra note 3.
---------------------------------------------------------------------------

    The Exchange has two depth measure calculations, which are Depth 
and Added Depth. The Depth measure (which measures the percentage of 
shares exceeding the displayed NBBO size that are executed at or better 
than the displayed NBBO price, for those orders that at the time of 
receipt exceed the displayed NBBO size) is currently weighted at 20% of 
the overall total score with a minimum threshold of 75%, i.e., no 
points for any executions below 75% of the NBBO size.\7\ The

[[Page 68491]]

Added Depth measure (which measures the relative percentage of overall 
BSE depth attributable to each specialist at the displayed NBBO price 
and in excess of the displayed NBBO size at the time the order is 
received) is currently weighted at 20% of the overall total score with 
a minimum threshold of 1%, i.e., no points for contributions less than 
1% to the added depth of all BSE specialists.\8\
---------------------------------------------------------------------------

    \7\ For example, assume the NBBO size is 500 shares displayed 
and the BSE specialist receives an order for 1200 shares. If the 
specialist executes 600 shares at the NBBO price, the specialist 
would receive credit for 600 shares out of 1200 shares, or 50%. See 
Securities Exchange Act Release No. 39730 (March 6, 1998); 63 FR 
12847 (March 16, 1998) (``March 1998 Order''). Points are allocated 
based on the specialist's raw score. In this example, the specialist 
would not receive any points for the Depth measure, because the 
specialist's Depth percentage is below 75%. The points for each 
measure are weighted to obtain an overall weighted score for all the 
measures.
    \8\ For example, assume the NBBO size is 500 shares displayed 
and the BSE specialist receives an order for 1200 shares, and that 
the specialist executes 600 shares at the displayed NBBO price. The 
number of shares over the NBBO size the specialist executed is 
calculated by subtracting 500 from 600. The specialist has 100 
shares of ``added depth.'' Then calculate the added depth for each 
qualifying order for each specialist, add the added depth for each 
specialist for each qualifying order, and total the added depth for 
all specialists combined. Next compare each specialist's added depth 
to the overall added depth for the floor to arrive at the percentage 
for each specialist relative to the other specialists. For example, 
100 added depth for Specialist A / 10,000 added depth for all 
specialists = 10% added depth for specialists A. See March 1998 
Order, supra note 7. Points are allocated based on the specialist's 
raw score. In this example, the specialist would receive points for 
the Added Depth measure, because the specialist's Added Depth 
percentage is equal to or greater than 1%. After points have been 
assigned for each measure under the SPEP, the points for each 
measure are assigned a weight to obtain an overall weighted score 
for all the measures.
---------------------------------------------------------------------------

    After reviewing two quarters of performance statistics, the 
Exchange has determined that four firms on the floor cannot meet the 1% 
Added Depth threshold, even if they were to achieve a Depth measure of 
100%, because their volume of business is de minimus in comparison to 
some of the larger firms. However, the Exchange believes that the 
combination of the Added Depth and Depth measures balances out the 
performance results: where small firms tend to score extremely high 
relative to the larger firms on the Depth measure, firms with a 
significant amount of business tend to score higher relative to the 
smaller firms on the Added Depth measure.
    Rather than eliminate the Added Depth measure in its entirety, the 
Exchange is proposing to combine the range points of the two depth 
measures and weight the overall combined score at 40%, as opposed to 
the current calculation which separately weights the range points of 
each measure at 20% each. This will result in the inclusion of both 
measures in the performance program, but will eliminate the requirement 
that a specialist appear before the Market Performance Committee for 
failure of a single measure that is mathematically impossible for that 
specialist to attain a passing score on. Under the proposed change, a 
specialist who failed the Added Depth category, but performed at some 
level above the range covered by the minimum threshold of 75%-79.9% for 
the Depth measure would end up over the minimum threshold for the 
combined score.
    The current range point scales and weighted scores for each of the 
depth measures are as follows:

----------------------------------------------------------------------------------------------------------------
                             Depth                                                 Added Depth
----------------------------------------------------------------------------------------------------------------
                                                     Weighted                                          Weighted
        Percentage of orders             Points    score (20%)   Percentage of orders      Points    score (20%)
----------------------------------------------------------------------------------------------------------------
<75.0...............................            0            0  <1.0..................            0            0
75.0-79.9...........................            5            1  1.0-1.9...............            5            1
80.0-84.9...........................           10            2  2.0-3.9...............           10            2
85.0-89.9...........................           15            3  4.0-5.9...............           15            3
>=90.0..............................           20            4  >=6.0.................           20            4
----------------------------------------------------------------------------------------------------------------

    The proposed range point scales for each of the depth measures and 
the combined weighted score are as follows:

----------------------------------------------------------------------------------------------------------------
                      Depth                                    Added Depth                   Combined depth
----------------------------------------------------------------------------------------------------------------
                                                                                           Total       Weighted
        Percentage of orders             Points     Percentage of orders      Points       points    score (40%)
----------------------------------------------------------------------------------------------------------------
<75.0...............................            0  <1.0..................            0            0            0
75.0-79.9...........................            5  1.0-1.9...............            5            5            2
80.0-84.9...........................           10  2.0-3.9...............           10           10            4
85.0-89.9...........................           15  4.0-5.9...............           15           15            6
>=90.0..............................           20  >=6.0.................           20           20            8
                                                                                                 25           10
                                                                                                 30           12
                                                                                                 35           14
                                                                                                 40           16
----------------------------------------------------------------------------------------------------------------

    The following results occur under the current and proposed depth 
measure calculations for (1) a specialist who scores 82% on the Depth 
measure and 0.7% on the Added Depth measure and (2) a specialist who 
scores 76% on the Depth measure and 4% on the Added Depth measure:

------------------------------------------------------------------------
              Specialist (1)                       Specialist (2)
------------------------------------------------------------------------
                           Current Calculation
------------------------------------------------------------------------
Depth 82% (10 pts)........................  Depth 76% (5 pts).
Added Depth 0.7% (0 pts)..................  Added Depth 4% (15 pts).
Weighted Scores total 2...................  Weighted Scores total 4.
------------------------------------------------------------------------
                          Proposed Calculation
------------------------------------------------------------------------
Depth 82% (10 pts)........................  Depth 76% (5 pts).

[[Page 68492]]

 
Added Depth 0.7% (0 pts)..................  Added Depth 4% (15 pts).
Combined Depth (10 pts)...................  Combined Depth (20 pts).
Weighted Score totals 4...................  Weighted Score totals 8.
------------------------------------------------------------------------

    In addition, the minimum threshold level for the Overall Program 
weighted score, which is currently set at ``at or above 5.00'', is 
being changed to compensate for the change in the depth calculations 
and will be set at ``at or above 7.00.''
    Under the pilot, assuming that a specialist performed at the 
minimum threshold level for each measure, the breakdown of weighted 
points would be as follows:

------------------------------------------------------------------------
                                      Weight                   Weighted
             Measure                 percent       Points       points
------------------------------------------------------------------------
Turnaround Time..................            5            5         0.25
Holding Orders Without Action....            5            5         0.25
Price Improvement (<\1/8\).......           20            5         1.00
Price Improvement (\1/8\)........           15            5         0.75
Price Improvement (>\1/8\).......           15            5         0.75
Depth............................           20            5         1.00
Added Depth......................           20            5         1.00
                                                            ------------
      Overall Weighted Score.....  ...........  ...........         5.00
------------------------------------------------------------------------

    Under the proposed rule change, assuming that a specialist 
performed at the minimum threshold level for each measure, the 
breakdown of weighted points would be as follows:

------------------------------------------------------------------------
                                      Weight                   Weighted
             Measure                 percent       Points       points
------------------------------------------------------------------------
Turnaround Time..................            5            5         0.25
Holding Orders Without Action....            5            5         0.25
Price Improvement (<\1/8\).......           20            5         1.00
Price Improvement (\1/8\)........           15            5         0.75
Price Improvement (>\1/8\).......           15            5         0.75
Depth and Added Depth............           40           10         4.00
                                                            ------------
      Overall Weighted Score.....  ...........  ...........         7.00
------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)(5) of the Act.\9\ Specifically, the Exchange believes 
that the proposal is designed to promote just and equitable principles 
of trade; to foster cooperation and coordination with persons engaged 
in regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in securities; 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.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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 written comments 
with respect to the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of 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 such 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, 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, 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 in the 
Commission's Public Reference Room in Washington, D.C.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 
number SR-BSE-98-7 and should be submitted by January 4, 1999.


[[Page 68493]]


    For the Commission, by the Division of Market Regulations, 
pursuant to delegated.\10\
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-32963 Filed 12-10-98; 8:45 am]
BILLING CODE 8010-01-M