[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applicable unless superseded by this chapter.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