[Federal Register Volume 65, Number 241 (Thursday, December 14, 2000)]
[Notices]
[Pages 78227-78230]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-31805]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43685; File No. SR-BSE-00-04]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change, as Amended by the Boston Stock Exchange, Inc., Relating to an 
Amendment to the Post Primary Session (``PPS'')

December 6, 2000.
    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 9, 2000, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the 
Exchange. On December 6, 2000, the BSE filed Amendment No. 1 to the 
proposed rule change.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from John Boese, Assistant Vice President, BSE, 
to Alton Harvey, Office Chief, Office of Market Watch, Division of 
Market Regulation, Commission, dated December 1, 2000 (``Amendment 
No. 1''). In Amendment No. 1, the BSE made corrections to its rule 
text and clarified issues regarding the language used in its filing.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange seeks to amend existing rules under Chapter IIB, Post 
4:00 P.M. Trading, which will allow member firms to accommodate various 
customer average pricing programs based on the primary market's primary 
trading session and to permit risk based portfolio programs which are 
based on the primary market's closing price.
    The proposed rule language is as follows: The new language is in 
italics.

CHAPTER IIB

Facilitation of GTX Orders

Application of Chapter

    Sec. 1. This chapter applies to the facilitation of certain orders 
after the close of the 9:30 a.m. to 4:00 p.m. trading session. All 
other provisions of the Constitution and Rules of the Exchange are 
applicable unless superseded by this chapter.

Facilitation of Customer Average Pricing Programs ``CP''s Eligible 
for Reporting During PPS

    Sec. 4. This section applies to the facilitation of certain 
transactions hereinafter referred to as Customer Average Pricing 
Programs, ``CP''s, which are reported during the PPS to facilitate 
transactions in single issue, or portfolios of stocks. In order to be 
eligible under this rule, all CPs must facilitate customer-to-customer 
(agency), or customer-to-principal (principal) average pricing programs 
that are based on primary market average prices. For the purposes of 
this Section and Section 5, only those stocks that are listed on the 
Exchange, or that are traded pursuant to Unlisted Trading Privileges 
(UTP), shall be eligible for these programs.
    (a) CPs are not exposed to the Exchange's PPS auction, are not 
price protected during PPS, and thus, may not be broken-up upon entry 
to the Exchange \1\
    (b) CPs must be electronically communicated to the Exchange via 
BEACON, identified as ``CP'' on each cross, entered by symbol and 
price, into the system, identified as to ``principal'' or ``agency'', 
and when applicable, identified as ``short exempt''. The time slice 
must be identified on the cross, identifying the beginning and ending 
slice for CP entered crosses.
    BEACON will record the transaction for Tape reporting with the 
identifier ``W'', to the nearest fraction or decimal eligible for 
reporting by the Exchange.
    (c) The following CP crossed orders are eligible for Reporting 
during the PPS:
    (i) Primary Market Average Price--Benchmark +/- (Plus or Minus)
    This CP Program provides customers with average pricing based on 
the primary market's trading session transactions that are reported to 
the consolidated tape. The Benchmark is the primary market's average 
price for the duration of the CP Program. If the Benchmark is exceeded, 
the customer will receive a better price. If the

[[Page 78228]]

Benchmark is not reached, the customer will receive a price less than 
the Benchmark price.
    (ii) Primary Market Average Price--Guaranteed
    This CP Program provides customers with a guarantee of receiving 
the Benchmark. Customers electing to participate in this Program will 
not be eligible to obtain a better, or an inferior price.
    (iii) Primary Market Average Price--Stop
    This CP Program provides customers with the Benchmark, or better.

After-Hours Risk Portfolio Crosses ``RP''s Eligible for PPS

    Sec. 5. After-Hours Risk Portfolio Crosses, ``RP''s, provide 
customers with the ability to sell (buy) baskets of stocks (at least 15 
stocks, $1 million or more in value) where the member firm guarantees 
to the customer the primary market closing price, less a discount (plus 
a premium) for the components that comprise the basket.
    (a) RP's are not exposed to the Exchange's PPS auction, and are not 
price protected.\2\
    (b) RPs must be electronically communicated to the Exchange via 
BEACON, identified as ``RF'' on each cross, entered by symbol and price 
into the system, identified as ``principal'' or ``agency'', and if 
appropriate identified as ``short exempt''. BEACON will record and 
enter the transaction, and report RPs to the consolidated tape in the 
aggregate. BEACON will record these transactions as RP Programs and 
provide regularly available information on aggregate volume levels by 
individual stock components on T+3, or thereafter \3\.

    \1\ These orders are not afforded price protection generally 
available to members under BSE Rules of Board of Governors, Chapter 
II, Section 33, Execution Guarantee.
    \2\ These orders are not afforded price protection generally 
available to members under BSE Rules of Board of Governors, Chapter 
II, Section 33, Execution Guarantee.
    \3\ Transactions which occur ``regular way'' will settle within 
the standard T+3 settlement period. Cash settlements may settle 
beyond the standard T+3 settlement period, according to the 
agreement of the parties to the transaction. The overwhelming 
majority of transactions occur ``regular way''.

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 Exchange is seeking to amend existing rules under Chapter IIB, 
Post 4:00 P.M. Trading, to incorporate new language which will permit 
members and member firms to use the PPS: (1) to accommodate various 
customer average pricing programs, in issues eligible to trade on the 
Exchange,\4\ that are based on the primary market trading session; and 
(2) to permit risk based portfolio programs, which are based on the 
primary market's closing price. In a side letter, the Exchange is also 
seeking an exemption to the short sale rule for purposes of supporting 
the programs described herein.\5\
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    \4\ Issues eligible to trade are those listed on the Exchange or 
listed pursuant to unlisted trading privileges.
    \5\ 17 CFR 240.10a-1. Review of the BSE's request for an 
exemption from the short sale rule is still pending before the 
Commission.
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a. Background

    The Exchange initiated its PPS program on January 13, 2000.\6\ The 
program runs from 4:00 p.m. through 4:15 p.m. (EST). Only orders 
entered after the Exchange's 4:00 p.m. close and designated as ``PPS'' 
are eligible for participation during this session. All PPS designated 
orders not executed during the PPS expire at the end of the PPS session 
and are not carried over to the next PPS session. Orders eligible for 
the Exchange's primary trading session are not eligible to participate 
during the PPS.
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    \6\ See Securities Exchange Act Release No. 41814 (August 31, 
1999); 64 FR 48885 (September 8, 1999).
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    Member firms may wish to use the Exchange's PPS to facilitate 
execution of certain customer average pricing and risk based portfolio 
programs on either an agency basis (wherein member firms act as an 
agent facilitating customers on both sides of the transaction) or as 
principal (wherein member firms act as principal on one side of the 
transaction). The main purpose of accessing the PPS to report these 
programs is to expdite execution and customer reporting of these 
particular crosses that would otherwise be reported later, such as at 
5:15 p.m. (EST), during the New York Stock Exchange's (``NYSE'') 
Crossing Session II.\7\
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    \7\ NYSE's Crossing Session II facilities the crossing of 
portfolios and operates between 4:00 p.m. and 5:15 p.m. (EST). This 
session is designed to facilitate trading of baskets of at least 15 
NYSE securities valued at $1 million or more. Members that have 
either facilitated a basket trade, or have paired two customer 
baskets, submit aggregate information to the NYSE for execution. At 
5:15 p.m., the NYSE prints the aggregate information of all baskets 
executed in this session to the consolidated tape. On the third day 
after the trade date (T+3), the individual component stocks executed 
as part of a basket are printed in aggregate form in the NYSE's 
Daily Sales Report.
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    The Exchange proposes to implement two general programs; the 
Customer Average Pricing Facilitation Programs (``CP Programs''), and 
Post Primary Session Risk Portfolio Facilitation Programs (``RP 
Programs''). Both of these programs are described below.

b. The Customer Average Pricing Facilitation Programs

    The CP Programs will allow member firms to act as a principal on 
one side of the cross (principal cross), or as an agent facilitating 
customers on both sides (agency cross), and may include single stocks 
or portfolios of stocks.
    Member firms facilitate their customer requests for average pricing 
based on primary market transactions reported over some specific period 
of time during the day (a so-called ``time slice''). A time slice can 
incorporate a full trading day or some part thereof. CP Programs will 
be ``time sliced'' during the primary market's trading session so that 
some will begin during the trading day (upon receipt of the program) 
and end prior to the close. Others will begin at some point during the 
trading day and last through the primary market's close. Lastly, a full 
day average pricing program will include all trading day primary market 
prints from the opening transaction to the last/closing transaction. 
For example, a customer may seek a guarantee of receiving the primary 
market average price from noon to 3:00 p.m. (a time slice) on an order 
to sell 100,000 shares of a particular stock. The member firm accepts 
the conditions so it can facilitate the customer's order. At the same 
time, the member firm assumes the pricing risk since it may not be able 
to obtain the average price. Thus, the customer directly benefits from 
this transaction because the price performance is guaranteed.
    There will be two types of reported facilitation crosses: (1) An 
agency cross, where the member firm has matched a buyer with a seller; 
and (2) a principal cross, where the member firm has assumed the 
contra-side of the

[[Page 78229]]

 customer's order. To facilitate a transaction where customers seek to 
participate on the buy side, member firms will need to sell to their 
customers irrespective of the tick. Therefore, an exemption to the 
short sale rule is required.\8\
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    \8\ See supra note 5.
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    Member firms may offer three types of average price orders to their 
customers: (1) Best efforts to obtain the average price, but with no 
guarantee; (2) a stop order guaranteeing the average price; and (3) a 
stop order guaranteeing the average price with the ability to improve 
the average price. As these transactions will be reported as averaged 
priced crosses during the Exchange's PPS session, they will not be 
exposed to the PPS auction. In that way, member firms will be able to 
immediately report these transactions to their customers.
    The three specific order types eligible for the CP program are the 
following:

Primary Market Average Price--Benchmark+/-(Plus or Minus)

    This order type provides customers with average pricing based on 
the primary market's trading session transactions, which are reported 
to the consolidated tape. The Benchmark price (``Benchmark'') is the 
primary market's average price for the duration of the time slice. If 
the Benchmark is exceeded, the customer will receive the better price. 
If the Benchmark is not achieved, the customer will receive the actual 
price which will be less than the Benchmark price.

Primary Market Average Price--Guaranteed

    This order type provides customers with a guarantee of receiving 
the Benchmark. Customers electing to participate in this Program will 
not be eligible to obtain a better, nor an inferior price.

Primary Market Average Price--Stop

    This order type provides customers with the Benchmark, or better, 
for the duration of the time slice. Customers will not receive an 
inferior price to the Benchmark.

c. The PPS Risk Portfolio Facilitation Programs

    Under the RP Program, member firms will offer customers a 
guaranteed price for the sale or purchase of a basket containing at 
least 15 stocks, $1 million in value or more. Member firms will provide 
customers with a guarantee of receiving the primary market's closing 
price, less a discount (or fee) in return for assuming the market risk 
of the basket. Thus, where member firms facilitate a transaction by 
being on the buy side, with the customer on the sell side, the 
discounted price of each component of the basket will be at a price 
less than the primary market's last sale. Conversely, where customers 
seek to be on the buy side, member firms will facilitate on the sell 
side and mark-up the value of the basket.
    Each component of a basket will be electronically reported during 
the PPS as principal facilitation crosses. These principal facilitation 
crosses will not be exposed to the PPS auction. The shares will be 
reported to the consolidated tape in the aggregate, not unlike the 
NYSE's Crossing Session II,\9\ to prevent disclosure of the side that 
the member firm has facilitated. This process is also similar to the 
system in place for NYSE Crossing Session program where reporting is in 
the aggregate for shares and not made available until T+3. In order to 
provide the ability to facilitate customers seeking to participate on 
the buy side, member firms will need to sell to their customers 
irrespective of the tick. Therefore, an exemption to the short sale 
rule is required.\10\
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    \9\ Under the Rules of the NYSE, members that have either 
facilitated a basket trade, or have paired two customer baskets, 
submit aggregate information to the NYSE for execution. At 5:15 
p.m., the NYSE prints the aggregate information of all baskets 
executed in this session to the consolidated tape. On the third day 
after the trade date (T+3), the individual component stocks executed 
as part of a basket are printed in aggregate form in the NYSE's 
Daily Sales Report.
    \10\ See supra note 5.
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    An example of a risk portfolio is where a customer sells a basket 
of stocks to the member firm at the primary market closing price. In 
return for assuming the risk, the member firm discounts the basket from 
the closing price. Another potential program may involve equities-
futures programs (EFP). For example, a mutual fund that needs to 
purchase securities after the close of trading for the amount of 
investment funds (cash) it has received during the trading day may 
purchase futures contracts because the stock market is closed. Because 
the mutual fund must convert the futures to stock at some point, a 
member firm may buy the futures from the mutual fund and sell the 
component or underlying stocks in return.
    These strategies require that the transactions not be immediately 
reported to the tape, because price exposure can disclose to 
competitors the position the member firm has assumed. Anonymity permits 
the member firm to unwind its position without risk of disclosure. The 
Exchange would emulate the process currently used by the NYSE and 
report to the tape in the aggregate and then provide additional 
information on T+3, or thereafter.\11\ As the closing prices are 
discounted, these programs may be priced away from the primary market's 
last sale and potentially outside of the day's trading range.
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    \11\ Transactions which occur ``regular way'' will settle within 
the standard T+3 settlement period. Cash settlements may settle 
beyond the standard T+3 settlement period, according to the 
agreement of the parties to the transaction. The overwhelming 
majority of transactions occur ``regular way.'' See Amendment No. 1, 
supra note 3.
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    For regulatory oversight purposes, the Exchange will require each 
member firm that reports transactions in CP or RP Programs to: (1) 
Identify the issue, shares, and price on each cross; (2) indicate 
whether the firm is facilitating as agent or principal; (3) indicate, 
if principal, that it is short exempt; (4) identify the time slice 
period for CP entered crosses; (5) indicate the average (Benchmark) 
price determined by the member firm; and (6) for RP programs, identify 
all crosses in a particular basket. The Exchange may also require other 
identifiers deemed necessary to monitor pricing. This information will 
be used to validate Benchmark prices.

d. Application of Rule 10a-1 of the Exchange Act

    The Exchange is separately requesting that the Commission exempt 
both the CP and RP Programs from Rule 10a-1, the short sale rule.\12\ 
Based on the manner of pricing transactions that will occur within the 
CP and RP programs, the practices that Rule 10a-1 is designed to 
prevent are not at issue. Specifically, over the course of the CP and 
RP Programs the price direction of a particular stock, i.e., the tick, 
will not be a factor in determining to fill customer CP and RP orders. 
Member firms will be acting as facilitators.
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    \12\ 17 CFR 240.10a-1. See supra note 5.
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2. Statutory Basis
    The statutory basis for the proposed rule change is section 6(b)(5) 
of the Act, in that it is designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating securities transactions, to remove 
impediments to perfect the mechanism of a free and open market and a 
national market system and, in general, to protect investors and the 
public interest.\13\
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    \13\ 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

[[Page 78230]]

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 Exchange 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.
    The BSE has requested accelerated approval of the proposed rule 
change, as amended. While the Commission is not prepared to grant 
accelerated approval at this time, the Commission will consider 
granting accelerated approval of the proposal at the close of an 
abbreviated comment period of 15 days from the date of publication of 
the proposal in the Federal Register.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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. 20549-0609. 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 or the principal 
office of the BSE. Copies of such filing will also be available for 
inspection and copying at the principal office of the Exchange. All 
submissions should refer to the File No. SR-BSE-00-04 and should be 
submitted by December 29, 2000.

For the Commission by the Division of Market Regulation, pursuant to 
delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-31805 Filed 12-13-00; 8:45 am]
BILLING CODE 8010-01-M