[Federal Register Volume 66, Number 15 (Tuesday, January 23, 2001)]
[Notices]
[Pages 7520-7522]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-1968]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43848; File No. SR-BSE-00-04]


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

January 16, 2001.

I. Introduction

    On March 9, 2000, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change that would amend existing rules 
under BSE Chapter IIB, Post 4:00 P.M. Trading, which would 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. On December 2, 2000, the BSE filed an amendment to the 
proposal.\3\ Notice of the proposed rule change, including Amendment 
No. 1, was published for comment in the Federal Register on December 
14, 2000.\4\ The Commission received no comments on the proposal. This 
order approves the proposed rule change, as amended.
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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, Rule 
Development and Market Structure, BSE, to Alton Harvey, Office 
Chief, Office of Market Watch, Division of Market Regulation 
(``Division''), 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.
    \4\ Securities Exchange Act Release No. 43685 (December 6, 
2000), 65 FR 78227 (December 14, 2000).
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II. Description of the Proposal

    The Exchange proposes to amend its existing rules under BSE Chapter 
IIB, Post 4:00 P.M. Trading, to incorporate new language which will 
permit members and member firms to use the PPS to: (1) Accommodate 
various customer average pricing programs in issues eligible to trade 
on the Exchange \5\ that are based on the primary market trading 
session; and (2) permit risk based portfolio programs which are based 
on the primary market's closing price. In a side letter, the Exchange 
seeks an exemption from the short sale rule and from certain reporting 
of transactions requirements for purposes of supporting its risk based 
portfolio programs described herein.\6\
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    \5\ Issues eligible to trade are those listed on the Exchange or 
listed pursuant to unlisted trading privileges.
    \6\ 17 CFR 240.10a-1 and 17 CFR 240.11Aa3-1. The BSE is 
requesting an exemption from the short sale rule, Rule 10a-1, and 
from the reporting of transactions for its risk based portfolio 
programs under Rule 11Aa3-1. See letter from John Boese, Assistant 
Vice President, Rule Development and Market Structure, BSE, to Larry 
Bergmann, Senior Associate Director, Division, Commission, dated 
January 2, 2001. Review of the BSE's request for an exemption from 
the short sale rules is still pending before the Commission. The 
Commission is granting the BSE an exemption from Rule 11Aa3-1 for 
its risk based portfolio programs.
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A. Background

    The Exchange initiated its PPS program on January 13, 2000.\7\ 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

[[Page 7521]]

are not eligible to participate during the PPS.
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    \7\ See Securities Exchange Act Release No. 41814 (August 31, 
1999); 64 FR 48885 (September 8, 1999).
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    The Exchange represents that 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 Exchange also represents 
that the main purpose of accessing the PPS to report these programs is 
to expedite 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 Section 
II.\8\
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    \8\ The Exchange describes the NYSE's Crossing Session II as 
follows: This session facilitates the crossing of portfolios and 
operates between 4:00 p.m. and 5:15 p.m. (EST). This session is also 
designed to facilitate trading of baskets of at least fifteen 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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B. The Exchange's Proposed Programs

    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'').
    The Customer Average Pricing Facilitation Programs. The Exchange 
represents that 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.
    The Exchange notes that member firms will 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 an incorporate a full trading day or some 
part thereof. The Exchange represents that the 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. The exchange 
further notes that a full day average pricing program will include all 
trading day primary market prints from the opening transaction to the 
last/closing transaction.
    The Exchange indicates that 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 customer's order. The 
Exchange further indicates that to facilitate a transaction where 
customers seek to participate on the buy side, member firms need to 
sell to their customers irrespective of the tick, and the Exchange 
therefore seeks an exemption to the short sale rule.\9\
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    \9\ See supra note 6.
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    The Exchange represents that 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. The Exchange further 
represents that these transactions will be reported as averaged priced 
crosses during the Exchange's PPS session, and that they will not be 
exposed to the PPS auction so that 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:
    (1) Primary Market Average Price-Bench +/-(Plus or Minus). The 
Exchange represents that 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 Exchange 
notes that 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.
    (2) Primary Market Average Price--Guaranteed. The Exchange 
represents that this order type provides customers with a guarantee of 
received the Benchmark. The Exchange notes, however, that customers 
electing to participate in this Program will not be eligible to obtain 
a better, not an inferior price.
    (3) Primary Market Average Price--Stop. The Exchange represents 
that this order type provides customers with the Benchmark, or better, 
for the duration of the time slice. The Exchange notes, however, that 
customers will not receive an inferior price to the Benchmark.
    The PPS Risk Portfolio Facilitation Programs. The Exchange 
represents that under the RP Program, member firms will offer customers 
a guaranteed price for the sale or purchase of a basket containing at 
least fifteen stocks, $1 million in value or more. Furthermore, the 
Exchange represents that 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.
    The Exchange represents that each component of a basket will be 
electronically reported during the PPS as principal facilitation 
crosses and that these principal facilitation crosses will not be 
exposed to the PPS auction. The Exchange notes that the shares will be 
reported to the consolidated tape in the aggregate, like on the NYSE's 
Crossing Session II,\10\ to prevent disclosure of the side that the 
member firm has facilitated. The Exchange also notes that this process 
is similar to the system in place for the NYSE Crossing Session program 
where reporting is in the aggregate for shares and not made available 
until T+3. Therefore, the Exchange believes that, 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, and consequently seeks an exemption to the short sale 
rule.\11\
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    \10\ The Exchange notes that, under the rules of the NYSE 
members that have either facilitated a basket trade, or have paired 
two customers 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.
    \11\ See supra note 6.
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    Moreover, the Exchange represents that 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, therefore, emulate the 
process currently used by the NYSE and report to the tape in the 
aggregate and then provide

[[Page 7522]]

additional information on T+3, or thereafter,\12\ The Exchange notes 
that, 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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    \12\ The Exchange states that transactions which occur ``regular 
way'' will settle within the standard T+3 settlement period, and 
that cash settlements may settle beyond the standard T+3 settlement 
period, according to the agreement of the parties to the 
transaction. The Exchange notes that 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 represents that it 
will require each member firm that reports transactions in CP or RP 
Programs to: (1) Identity 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 
represents that it may also require other identifiers deemed necessary 
to monitor pricing. The Exchange will use this information to validate 
Benchmark prices.

C. Request for Exemptions from Rule 10a-1 and Rule 11Aa3-1 of the Act

    The Exchange requests that the Commission exempt both the CP and RP 
Programs from the short sale rule, Rule 10a-1, of the Act.\13\ The 
Exchange believes that, 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, the 
Exchange indicates that 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 customers CP and orders. The Exchange 
also notes that member firms will be acting as facilitators.
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    \13\ 17 CFR 240.10a-1. See supra note 6.
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    The Exchange also requests that the Commission exempt the RP 
Programs from certain reporting of transactions requiring under Rule 
11Aa3-1 of the Act because under the RP Programs a composite 
transaction would be reported instead of individual transactions.\14\
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    \14\ 17 CFR 240.11Aa3-1. See supra note 6.
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III. Discussion

    The Commission has reviewed carefully the proposed rule change, as 
amended, and finds that it is consistent with the Act and the rules and 
regulations promulgated thereunder applicable to a national securities 
exchange and, in particular, with the requirements of Section 6(b).\15\ 
Specifically, the Commission finds that approval of the proposed rule 
change is consistent with Section 6(b)(5) \16\ in that it is designed 
to promote just and equitable principles of trade, to remove 
impediments and 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.
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    \15\ 15 U.S.C. 78f(b). In approving this proposal, the 
Commission has considered the proposed rule's impact on efficiency, 
competition and capital formation. 15 U.S.C. 78c(f).
    \16\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that the proposed rule change and the programs 
established thereunder will assist the BSE in allowing its member firms 
to use the PPS to facilitate execution of certain customer average 
pricing and risk based portfolio programs, and to act on either a 
principal or agent basis by entering crossing orders with their 
customers after hours to be executed with each other. By allowing 
access to the PPS to report these programs, the commission notes that 
the BSE may be able to expedite execution and customer reporting of 
these particular crosses at 4:15 p.m. (EST), rather than at 5:15 p.m. 
(EST) during the NYSE's Crossing Session II.
    The BSE requests an exemption from Rule 10a-1, the short sale rule, 
and Rule 11Aa3-1 of the Act.\17\ The Commission is currently reviewing 
the BSE's request for exemption from the short sale rule.\18\ The 
Commission is granting the BSE's request for exemption of its RP 
Programs from the reporting requirements of Rule 11Aa3-1 of the Act 
because the proposed reporting procedures for the RP programs relate to 
composite transactions. The Commission finds that granting such an 
exemption would be consistent with the requirements of Rule 11Aa3-
1.\19\
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    \17\ See supra note 6.
    \18\ See supra note 6.
    \19\ See supra note 6.
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    In the notice, the Commission indicated that it would consider 
granting accelerated approval of the proposal after a 15-day comment 
period. Although, the Commission received no comment letters on the 
proposal during the 15-day comment period, the Commission does not find 
good cause for accelerating approval of the proposed rule change, as 
amended.\20\
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    \20\ The BSE originally filed the proposed rule change with the 
Commission on March 9, 2000, and requested accelerated approval at 
that time. The BSE then requested that the Commission delay noticing 
the proposed rule change until the impact of the rescission of NYSE 
Rule 390 was determined. In November 2000, the BSE decided to 
proceed with this filing. The Commission, therefore, does not 
believe that acceleration of approval of this proposed rule change 
would be appropriate.
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IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular with Section 6(b)(5).\21\
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    \21\ 15 U.S.C. 78f(b)(5).
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    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-BSE-00-04) is approved.
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    \22\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\23\
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    \23\ 17 CFR 200.30/3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-1968 Filed 1-22-01; 8:45 am]
BILLING CODE 8010-01-M