[Federal Register Volume 64, Number 111 (Thursday, June 10, 1999)]
[Notices]
[Pages 31332-31335]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-14684]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41471; File No. SR-BSE-99-1]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Boston Stock Exchange, Inc. To Allow Specialist Remote 
Access to the BEACON System

June 2, 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 March 26, 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, II 
and III below, which items have been prepared by the Exchange.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The proposed rule change's purpose was clarified and 
technical changes were made during a conversation between George 
Mann, General Counsel, BSE, and Joshua Kans, Attorney, Division of 
Market Regulation (``Division''), Commission, May 26, 1999.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange seeks to adopt a one-year pilot program for remote 
specialist trading on the BEACON trading system, under which BSE 
specialists will be permitted to conduct regular trading activities off 
the BSE's trading floor. Proposed new language is italicized.
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[[Page 31333]]

CHAPTER XXXIII

Boston Exchange Automated Communication Order-routing Network

(BEACON)

BEACON Remote

    Sec. 9. BEACON terminals and related equipment will be provided to 
remote member firm locations for specialist trading. The remote 
terminals will be linked to the BEACON Trading System and will provide 
the same functionality as is available to on-floor specialists. All 
orders directed to remote specialists, including ITS commitments and 
administrative messages, will be from the Woburn data center through 
BEACON as occurs with on-floor specialists. Floor broker orders will be 
routed to remote specialists under the same criteria by which they are 
routed to on-floor specialists. There will be no remote floor brokerage 
services. The following shall apply to specialists participating in the 
12-month BEACON Remote pilot program:
    (a) All rules and policies of the Board of Governors of the 
Exchange shall apply except as specifically excluded or amended under 
this section.
    (b) Only member firms with existing Exchange specialist operations 
are eligible for participation in the 12-month BEACON Remote pilot 
program.
    (c) Any eligible firm may apply to the Market Performance Committee 
to participate in the pilot program.
    (d) Unless the Market Performance Committee specifically authorizes 
otherwise, participating member firms shall be prohibited from trading 
remotely any securities which are currently being traded on-floor by 
that individual member firm.
    (e) The number of specialty stocks traded remotely shall not exceed 
two hundred (200) per specialist account.
    (f) Individual securities may not be traded by one specialist firm 
in more than one location.
    (g) All layoff orders must be included in BEACON drop copy.\1\
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    \1\ Drop copy is a BEACON system enhancement which permits the 
electronic loading of layoff system trade data for realtime 
specialist position updating, clearance, settlement and audit trail 
purposes.\4\
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    (h) All rule references pertaining to the trading floor of the 
Exchange, including:

Chapter I-B, Section 2 (``Dealings on Floor--Hours'');
Chapter I-B, Section 3 (``Dealings on Floor--Persons'');
Chapter II, Section 2 (``Recording of Sales'');
Chapter II, Section 6 (``Bids and Offers for Stocks'');
Chapter II, Section 9 (``Trading for Joint Account'');
Chapter II, Section 10 (``Discretionary Transactions'');
Chapter II, Section 13 (``Trading Against Privileges'');
Chapter II, Section 15 ``Record of Orders from Offices to Floor'');
Chapter II, Section 23 (``Dealing on Other Exchanges, or Publicly 
Outside the Exchange'');
Chapter II, Section 31 (``Offering Publicly on the Floor'');
Chapter VII, Section 2 (``Member-organization Accounts'');
Chapter XV, Section 1 (``Registration'');
Chapter XV, Section 2 (``Responsibilities'');
Chapter XV, Section 3 (``Code of Acceptable Business Practices for 
Specialists'');
Chapter XV, Section 5 (``Preference on Competitive Basis'');
Chapter XV, Section 6 (``The Specialist's Book'');
Chapter XV, Section 9 (``Opening Listed Stock'');
Chapter XV, Section 10 (``Hours'');
Chapter XV, Section 16 (``Status of Orders When Primary Market 
Closed'');
Chapter XV, Section 18 (``Procedures for Competing Specialists'');
Chapter XVI (``Special Offerings'');
Chapter XVIII, Section 1 (``Penalties'');
Chapter XVII, Section 4 (``Imposition of Fines for Minor Violation(s) 
of Rules and Floor Decorum Policies'');
Chapter XX, Section 6 (``Gratuities'');
Chapter XXII, Section 2 (``Capital and Equity Requirements'');
Chapter XXXI, Section 2 (``Intermarket Trading System'');
Chapter XXXI, Section 3 (``Pre-Opening Application'');
Chapter XXXI, Section 4 (``Trade-Throughs and Locked Markets'');
Clearing Corporation Rule 3, Section 2 (``Dual Member Broker/Dealer 
Accounts'');
Clearing Corporation Rule 3, Section 3 (``Boston Representative Broker/
Dealer Accounts'');
Clearing Corporation Rule 3, Section 4 (``Specialist Member'');
Clearing Corporation Rule 4, Section 4 (``Bills Rendered'');

shall be deemed to include any trading done remotely through BEACON, 
and all such trades shall be deemed to be executions on the Exchange.
    (i) A written confidentiality policy regarding the location of 
equipment and access to information, terminals and equipment must be 
adopted by the firm and filed with and approved by the Exchange prior 
to the commencement of remote trading.
    (j) Floor policies regarding dress code, smoking, identification 
and visitors shall not apply.
    (k) All Exchange correspondence, memoranda, bulletins and other 
publications shall be sent to BEACON Remote specialists via electronic 
mail through BEACON and via U.S. mail or overnight delivery.
    (l) All BEACON Remote specialists will have stentofon, as well as 
telephone access, to the physical trading floor.
    (m) Servicing of BEACON terminals and related equipment shall be by 
Exchange authorized and trained personnel only.
    (n) The \4\Exchange's examination program would include the remote 
specialist operations of all firms.
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    \4\ In its filing, the Exchange used the term ``DOT system trade 
data'' in this footnote. The Exchange now proposes to use the term 
``layoff system trade data.'' Conversation between George Mann, 
General Counsel, BSE, and Joshua Kans, Attorney, Division, 
Commission, May 26, 1999.
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    (o) Any arbitration or disciplinary action arising out of trading 
activity pursuant to this section would be held at the physical offices 
of the Exchange located in Boston.
* * * * *

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 establish a limited 
scope, one-year pilot program to provide for remote specialist trading 
through the BEACON system.\5\ At present, access to the BEACON system 
is provided only to specialists located on the Exchange's physical 
trading floor, and all market-making occurs on that physical floor. The 
Exchange views the remote specialist proposal as the natural first

[[Page 31334]]

step in the progression from a manual open outcry system of trading to 
an automated electronic trading system. Although the Exchange believes 
that many traditional exchanges are considering eliminating their 
trading floors, due to the numerous electronic communications networks 
with which the Exchange must now compete, the Exchange seeks to provide 
its specialist member firms with the option of virtual access to the 
Exchange's physical floor via a remote BEACON terminal located in the 
firms' offices, while retaining the ability to centralize specialists 
on the Exchange's physical trading floor.
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    \5\ The BEACON system is the Exchange's securities 
communication, order-routing and execution system. See generally BSE 
Rules, Chapter XXXIII.
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    The Exchange proposes to implement the program by adding Section 9, 
``BEACON Remote,'' to Chapter XXXIII of the Exchange's rules. Because 
of the framework of the BEACON trading system and the BEAM on-line 
surveillance system,\6\ all trades on the Exchange occur within the 
confines of BEACON and are monitored real-time BEAM. Section 9 would 
permit specialist operations to function remotely within the confines 
of these Exchange systems, and within the framework of the existing 
rules of the Exchange, although those operations would not be 
physically conducted on the trading floor. As such, all executions that 
occur within the BEACON System, whether on-floor or remote, would be 
considered executions occurring on the floor of the Exchange, not 
unlike executions which occur today on the Cincinnati Stock Exchange, 
which has no physical trading floor. Both remote and on-floor 
specialists would have equal access to all BEACON functionalities, 
including access to the Intermarket Trading System (``ITS'') through 
the recently developed BEACON System interface.
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    \6\ The BEAM system provides the Exchange with real-time 
capabilities to monitor specialist trading activity within the 
BEACON system.
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    The Exchange is proposing to permit remote specialist access to the 
BEACON system for a 12-month pilot program. The Exchange would provide 
BEACON terminals and related equipment to remote member firm locations 
for specialist trading during this period. The remote terminals will be 
linked to the BEACON Trading System utilizing dedicated lines and 
connected via the same wide area network currently utilized to link the 
physical trading floor to the Woburn data center. These terminals will 
provide the same functionality as is available to on-floor specialists. 
All orders directed to remote specialists, including ITS commitments 
and administrative messages, will be from the Woburn data center 
through BEACON as occurs with on-floor specialists. Floor brokers 
orders will also be routed to remote specialists under the same 
criteria by which they are routed to on-floor specialists. Members will 
not be able to use the BEACON Remote pilot to conduct floor brokerage 
services.
    Proposed Section 9(a) would provide that all rules and policies of 
the Board of Governors of the Exchange shall apply except as 
specifically excluded or amended. Accordingly, all of the Exchange's 
membership, net capital, equity, examination, specialist performance 
evaluation, competing specialist, stock allocation, trading and 
specialist rules and policies would apply equally to remote 
specialists. Surveillance and compliance monitoring of remote 
specialist trading activity would occur through BEAM as it does today 
for on-floor specialists, and trading issues with a remote specialist 
would be addressed via telephone and e-mail (as opposed to in person on 
the trading floor).
    The following limitations will apply to remote specialists 
participating in the 12-month pilot program: Proposed Section 9(b) 
would provide that only existing Exchange specialist operations are 
eligible to participate. Proposed Section 9(e) would provide that the 
total number of specialty stocks traded remotely shall not exceed two 
hundred (200) per specialist account. Proposed Section 9(d) would 
provide that securities currently traded on-floor by a firm cannot be 
moved to a remote location unless specifically authorized by the 
Exchange's Market Performance Committee. Proposed Section 9(g) would 
provide that all layoff orders must be included in BEACON drop copy, 
meaning that remote specialists would be required to utilize layoff 
systems that are electronically linked to BEACON to help ensure that a 
surveillance audit trail is created by the drop copy report.\7\
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    \7\ The drop copy system generates a report of all executions of 
orders laid off to other market centers for purposes of specialist 
position updating, clearance and settlement, and audit trail. BSE 
members may layoff orders to the New York Stock Exchange through the 
Designated Order Turnaround (``DOT'') system and to the American 
Stock Exchange through the Post Execution Reporting (``PER'') 
system.
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    In addition, the following provisions shall apply to the program: 
any eligible firm may apply to the Exchange's Market Performance 
Committee to participate in the pilot program (Section 9(c)); a 
specialist firm may not trade individual securities in more than one 
location (Section 9(f)); all rule references pertaining to the trading 
floor of the Exchange shall be deemed to include any trading done 
remotely through BEACON, and all such trades shall be deemed to be 
executions on the Exchange (Section 9(h)); a written confidentiality 
policy regarding the location of equipment and access to information, 
terminals and equipment must be adopted by the firm and filed with and 
approved by the Exchange prior to the commencement of remote trading 
(Section 9(i)) \8\; floor policies regarding dress code, smoking, 
identification and visitors shall not apply (Section 9(j)) \9\; all 
Exchange correspondence, memoranda, bulletins and other publications 
shall be sent to BEACON Remote specialists via electronic mail through 
BEACON and via U.S. mail or overnight delivery (Section 9(k)); all 
BEACON Remote specialists will have stentofon, as well as telephone 
access, to the physical trading floor (Section 9(l) \10\; servicing of 
BEACON terminals and related equipment shall be by Exchange authorized 
and trained personnel only (Section 9(m)); the Exchange's examination 
program would include the remote specialist operations of all firms 
(Section 9(n)) \11\; and any arbitration or disciplinary action arising 
out of trading activity pursuant to this section would be held at the 
physical offices of the Exchange located in Boston (Section 9(o)).
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    \8\ Proposed confidentiality policies should provide that BEACON 
terminals would be physically located in a secure area without open 
access, and that members have made a specific person responsible for 
ensuring compliance.
    \9\ The Exchange adopted those floor policies in its Minor Rule 
Plan, pursuant to BSE Rules chapter XVIII, section 4.
    \10\ BSE's stentofon system provides electronic voice 
communications among BSE members.
    \11\ The Exchange conducts a full examination of the books and 
records of those member firms assigned to it as the Designated 
Examining Authority (``DEA''). In addition, the Exchange conducts a 
more limited examination of the books and records of all non-DEA 
member firms with specialist operations on the floor (limited to 
books and records related to specialist operation only). This review 
would be expanded to include the examination of the books and 
records of all firms with remote specialist operations.
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(2) Basis
    The statutory basis for the proposed rule change is Section 6(b)(5) 
of the Act,\12\ in that it 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

[[Page 31335]]

general, to protect investors and the public interest; and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers or dealers.
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    \12\ 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 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

    No written comments were either solicited or received.

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, 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-99-1 and 
should be submitted by July 1, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-14684 Filed 6-9-99; 8:45 am]
BILLING CODE 8010-01-M