[Federal Register Volume 64, Number 61 (Wednesday, March 31, 1999)]
[Notices]
[Pages 15384-15386]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-7807]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41200; File No. SR-BSE-99-3]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Boston 
Stock Exchange, Inc. Relating to Limitations on Trading During 
Significant Market Moves

March 22, 1999.
    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 February 22, 1999, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II 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 and to approve the 
proposal on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The Exchange seeks to amend its market volatility rules to 
correspond with recent changes implemented by the New York Stock 
Exchange (``NYSE'').
    The text of the proposed rule change is below. Proposed new 
language is italicized and proposed deletions are in brackets.
* * * * *

CHAPTER II

Dealings on the Exchange

Limitations on Trading During Significant Market Moves

    [Sec. 34B. On any day when the DJIA has advanced by 50 points or 
more from its closing value on the previous trading day, all index 
arbitrage orders to buy any component stock of the S&P 500 Stock 
Price Index \2\ must be entered with the instruction ``buy minus''. 
If, on that day, the DJIA subsequently reaches a value that is 25 
points or less above the closing value on the previous trading day, 
this requirement shall not apply. This principal shall govern the 
imposition and removal of the buy minus requirement as to all 
subsequent movements in the DJIA on that day. On any day when the 
DJIA has declined by 50 points or more from its closing value on the 
previous trading day, all index arbitrage orders to sell must be 
entered with the instruction ``sell plus''. If, on that day, the 
DJIA subsequently reaches a value that is 25 points or less below 
the closing value on the previous, this requirement shall not apply. 
This principle shall govern the imposition and removal of the sell 
plus requirement as to all subsequent movements in the DJIA on that 
day. All orders containing the instruction buy minus or sell plus 
shall be executed as provided in Chapter I, Section 3.
    \2\ ``Standard & Poor's 500 Stock Price Index'' is a service 
mark of Standards & Poor's Corporation.]
    [Supplemental Material
    .01 ``Index arbitrage'' means an arbitrage trading strategy 
involving the purchase or sale of a group of stocks in conjunction 
with the purchase or sale, or intended purchase or sale, of one or 
more cash-settled options or futures contracts on index stock groups 
or options on any such futures contracts (collectively, ``derivative 
index products'') in an attempt to profit by the price difference 
between the group of stocks and the derivative index products. While 
the purchase or sale of the stocks must be in conjunction with the 
purchase or sale of the derivative index products, the transactions 
need not be executed contemporaneously to be considered index 
arbitrage.]
    Sec. 34B. (a) All index arbitrage orders to sell any component 
stock of the S&P 500 Stock Price Index \2\ must be entered with the 
instruction ``sell plus'' on any trading day when the Dow Jones 
Industrial Average declines below its closing value on the previous 
trading day by at least the ``two-percent value'' as calculated 
below. This index arbitrage order entry requirement shall remain in 
effect for the remainder of the trading day. However, the index 
arbitrage order entry requirement pursuant to this paragraph (a) 
shall be removed if the DJIA subsequently reaches a value below its 
closing value on the previous trading day that is a decline equal to 
the ``one-percent value'' or less as calculated below.
---------------------------------------------------------------------------

    2``Standard & Poor's 500 Stock Price Index'' is a service mark 
of Standards & Poor's Corporation.]
---------------------------------------------------------------------------

    (b) All index arbitrage orders to buy any component stock of the 
S&P 500 Stock Price Index must be entered with the instruction ``buy 
minus'' on any trading day with the DJIA advances above its closing 
value on the previous trading day by at least the``two-percent 
value'' as calculated below. This index arbitrage order entry 
requirement shall remain in effect for the remainder of the trading 
day. however, the index arbitrage order entry requirement pursuant 
to this paragraph (b) shall be removed if the DJIA subsequently 
reaches a value above its closing value on the previous trading day 
that is an advance equal to the ``one-percent value'' or less as 
calculated below.
    (c) The principles in paragraphs (a) and (b) shall govern the 
imposition and removal of the index arbitrage order requirements as 
to all subsequent movements in the DJIA on that day.
    Supplementary material:
    .10 The ``two-percent value'' shall be calculated at the 
beginning of each calendar quarter and shall be two-percent (2.0%), 
rounded down to the nearest ten points, of the average closing value 
of the DJIA for the

[[Page 15385]]

last month of the previous quarter. The ``one-percent value'' shall 
be one-half, rounded down to the nearest ten points, of the ``two-
percent value.''
    .20 The index arbitrage order entry restrictions shall not apply 
to index arbitrage market-at-the-close orders in liquidation of 
previously established stock positions against derivative index 
products entered on the last business day prior to the expiration or 
settlement of such derivative index products. Such orders shall be 
entered pursuant to each procedures as the Exchange may from time to 
time prescribe.
    .30 All orders containing the instruction ``buy minus'' or 
``sell plus'' shall be executed as provided in Chapter I, Section 3.
    .40 Definitions. (a) For purpose of this Rule, ``index 
arbitrage'' means a trading strategy in which pricing is based on 
discrepancies between a ``basket'' or group of stocks and the 
derivative index product (i.e., a basis trade) involving the 
purchase or sale of a ``basket'' or group of stocks in conjunction 
with the purchase of sale, or intended purchase or sale, of one or 
more derivative index products in an attempt to profit by the price 
difference between the ``basket'' or group of stocks and the 
derivative index products. While the purchase of sale of the stocks 
must be in conjunction with the purchase or sale of derivative index 
products, the transactions need not be executed contemporaneously to 
be considered index arbitrage. The term ``derivative index 
products'' refers to cash-settled options or futures contracts on 
index stock groups, and options on any such futures contracts.
    (b) ``Program trading means either (A) index arbitrage or (B) 
any trading strategy involving the related purchase or sale of a 
``basket'' or group of 15 or more stocks having a total market value 
of $1 million or more. Program trading includes the purchases or 
sales of stocks that are part of a coordinated trading strategy, 
even if the purchases or sales are neither entered or executed 
contemporaneously, nor part of a trading strategy involving options 
or futures contracts on an index stock group, or options on any such 
futures contracts, or otherwise relating to a stock market index.
    (c) ``Account on an individual investor'' means an account 
covered by Section 11(a)(1)(E) of the Securities Exchange Act of 
1934.

Stop Order Bans

    Sec. 35(a). Whenever the primary market for a stock admitted to 
dealings on the Boston Stock Exchange institutes a stop and stop 
limit order ban, the Exchange will also ban such orders in the stock 
until such time as the ban in the primary market is lifted.
    [(b) Whenever the New York Stock Exchange (NYSE) institutes a 
stop and stop limit order ban pursuant to NYSE Rule 80A, the BASE 
will also ban stop and stop limit orders for the remainder of the 
trading day, except that a member or member organization may enter a 
stop or stop limit order of 2,099 shares or less for the account of 
an individual investor pursuant to instructions received directly 
from the individual investor.
    (i) An ``account of the individual investor'' means an account 
covered by Section 11(a)(1)(E) of the Securities Exchange Act of 
1934.]
    Supplementary Material:

Stop Order Ban Procedures

    [.01. Whenever the New York Stock Exchange (``NYSE'') implements 
a stop order ban pursuant to NYSE Rule 80A, the Boston Stock 
Exchange (``BSE'') will also ban such orders as follows:
    (i) Upon notice from the NYSE by announcement over the ``hoot 
and holler system'' that all new stop and stop limit orders in all 
stocks are banned for the remainder of the day (except for orders up 
to 2099 shares for the account of an individual investor), the BSE 
will announce to its floor and BEACON subscribers that a stop order 
ban in all stocks is in effect for the remainder of the day, except 
for orders up to 2099 shares for the accounts of individual 
investors.
    (ii) The entry of stop and stop limit orders (other than orders 
up to 2099 shares for the accounts of individual investors) will be 
banned on the BSE for the remainder of the day. Any stop or stop 
limit orders received in the BEACON system will be rejected and the 
message ``stop not accepted--ban in effect'' will be sent back to 
the entering firm.
    (iii) Any stop and stop limit orders residing on the 
specialists' books at the time the ban goes into effect will remain 
eligible for execution.]
    [.02] .01. Whenever the primary market implements a stop order 
ban in an individual stock due to an unusually large accumulation of 
stop and stop limit orders, the BSE will also ban such orders as 
follows:
    (i) Upon notice from the primary market by indication over the 
consolidated tape that stop and stop limit orders are banned in an 
individual stock, the Boston Stock Exchange will announce to its 
floor and BEACON subscribers that a stop order ban is in effect in 
the individual stock.
    (ii) The entry of stop and stop limit orders will be banned 
until such time as the ban is lifted in the primary market and that 
information is disseminated on the consolidated tape. Any orders 
received in the BEACON system will be rejected and the message 
``stop not accepted--ban in effect'' will be sent back to the 
entering firm.
    (iii) Any stop and stop limit orders residing on the 
specialist's book at the time the ban goes into effect will be 
canceled by the Exchange. The cancellation message ``U R Out'' will 
be sent back to the entering firm.

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 purpose of the proposed rule change is to amend two BSE rules 
that limit certain types of trading during significant market moves.
    Chapter II, Section 34B of the BSE's rules states that on any day 
where the Dow Jones Industrial Average (``DJIA'') advances by more than 
50 points from its closing value on the previous trading day, all index 
arbitrage orders to buy any component stock of the S&P 500 Stock Price 
Index must be entered with the instruction ``buy minus.'' Declines of 
50 points from the previous trading day's closing value require that 
all index arbitrage orders to sell be entered with the instruction 
``sell plus.'' The stabilizing requirements associated with that 50 
point ``collar'' are removed if the DJIA moves back to or within 25 
points of the previous day's close. Until recently, the NYSE similarly 
restricted index arbitrage using a 50 point collar.
    Chapter II, Section 35(b) and Supplementary Material .01 of the 
BSE's rules states that whenever the NYSE implements a stop order ban 
pursuant to NYSE Rule 80A, the BSE will also ban stop and stop limit 
orders for the remainder of the day, except for orders of 2099 shares 
or less for the account of an individual investor pursuant to 
instructions from that investor. Until recently, NYSE Rule 80A 
contained ``sidecar'' provisions that would be triggered if the primary 
S&P 500 futures contract declined by 12 points from the previous close. 
When a market decline triggered those sidecar procedures, the NYSE 
would divert program trading orders to a separate file for five minutes 
and would restrict the entry of stop orders or stop limit orders.
    The Commission recently approved a proposed NYSE rule change that 
widened the 50 point collars and eliminated the sidecar provisions.\3\ 
In lieu of the 50 point collars methodology for advances or declines, 
collars will now be based on a percentage of the average closing value 
of the DJIA. In particular, the collars would be imposed when the DJIA 
declines or advances from the prior day's close by an amount equal to 
two percent (rounded down to the nearest ten points) of the average

[[Page 15386]]

closing value. The collars would be removed when the DJIA comes back or 
retreats to a value which represents a decline or advance from the 
prior day's close by an amount equal to one half of the ``two percent 
value'' (rounded down to the nearest ten points). The proposed collars 
are to be calculated quarterly based on the average closing value of 
the DJIA for the last month of the previous calendar quarter.
---------------------------------------------------------------------------

    \3\ Securities Exchange Act Release No. 41041 (February 11, 
1999), 64 FR 8424 (February 19, 1999).
---------------------------------------------------------------------------

    The BSE proposed to modify Section 34B to reflect the NYSE rule 
change, by replacing the 50 point collar with a level based on two 
percent of the DJIA. When the DJIA declines by the ``collar value,'' 
all index arbitrage orders to sell any component stock of the S&P 500 
must be marked ``sell plus'' for the remainder of the day. If the DJIA 
advances by the ``collar value,'' all index arbitrage orders to buy any 
component stock of the S&P 500 must be marked ``buy minus'' for the 
remainder of the trading day.
    In addition, the BSE is proposing to delete the stop and stop limit 
order restrictions found in Section 35(b) and Supplementary Material 
.01, in response to the NYSE's elimination of the sidecar provisions of 
NYSE Rule 80A.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
in general,\4\ and furthers the objectives of Section 6(b)(5) in 
particular,\5\ in that it is designed to promote just and equitable 
principles of trade, to remove impediments to, and perfect the 
mechanisms of a free and open market and, in general, to protect 
investors and the public interest.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78f(b).
    \5\ 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 on 
the proposed rule change.

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

    After careful consideration, the Commission has concluded, for the 
reasons set forth below, that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder. Both BSE rules in question--the 50 point collar provision 
of Chapter II, Section 34B, and the ``sidecar'' stop and stop limit 
order restrictions of Chapter II, Section 35(b) and Supplementary 
Material .01--are substantially similar to recently changed NYSE rules. 
Modifying the BSE rules to conform to the counterpart NYSE rules will 
eliminate a needless disparity between the practices of the two 
exchanges. Moreover, the Commission noted in its order approving the 
proposed NYSE rule changes that the sidecar provisions appeared 
unnecessary and that eliminating them was in the public interest. The 
Commission also noted that widening the collar provisions represented 
an improvement over the earlier trading restrictions, and the 
Commission recommended that the NYSE periodically evaluate the 
continuing need for those restrictions on index arbitrage. The 
Commission believes that the same principles apply to the BSE.
    The BSE has requested that the Commission grant accelerated 
approval of the proposed rule change to correspond with the NYSE's 
recent rule changes. The Commission finds good cause for approving the 
proposed rule change prior to the 30th day after the date of 
publication of notice of filing in the Federal Register. The Commission 
has already approved an equivalent rule change for the NYSE after 
careful analysis of public comments. Moreover, maintaining the existing 
trading restrictions on the BSE, even after they have been relaxed on 
the NYSE, may affect broker-dealer order routing decisions in a way 
that is contrary to the competitive intent behind the National Market 
System.

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, NW, Washington, DC 20549-0609. 
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-98-3 and 
should be submitted by April 21, 1999.

V. Conclusion

     It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act 
\6\ that the proposed rule change (SR-BSE-99-3) is hereby approved on 
an accelerated basis.\7\
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78s(b)(2).
    \7\ In approving the proposal, the Commission has considered the 
rule's impact on efficiency, competition and capital formation. 15 
U.S.C. 78c(f).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-7807 Filed 3-30-99; 8:45 am]
BILLING CODE 8010-01-M