[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.
* * * * *
[[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