[Federal Register Volume 66, Number 207 (Thursday, October 25, 2001)]
[Notices]
[Pages 54039-54041]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-26864]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44952; File No. SR-BSE-2001-01]


Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Order 
Approving Proposed Rule Change and Amendment No. 1 Thereto and Notice 
of Filing and Order Granting Accelerated Approval of Amendment No. 2 to 
the Proposed Rule Change Relating to the Trading of Nasdaq Securities 
on the Floor of the Exchange

October 18, 2001.

I. Introduction

    On May 15, 2001, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), 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 regarding the trading of Nasdaq 
securities on the floor of the Exchange, pursuant to unlisted trading 
privileges (``UTP''). On June 15, 2001, the Exchange submitted 
Amendment No. 1 to the proposed rule change.\3\ The proposed rule 
change, as amended by Amendment by Amendment No. 1, was published in 
the Federal Register on July 3, 2001.\4\ The Commission received two 
comment letters on the proposed rule change.\5\ On October 4, 2001, the 
BSE submitted Amendment No. 2 to the proposed rule change.\6\ This 
order approves the proposed rule change, as amended. In addition, the 
Commission solicits comment on Amendment No. 2 to the proposed rule 
change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Form 19b-4 dated June 14, 2001 (``Amendment No. 1'').
    \4\ Securities Exchange Act Release No. 44476 (June 26, 2001), 
66 FR 35293.
    \5\ See letters to Jonathan G. Katz, Secretary, SEC, from Kevin 
J.P. O'Hara, General Counsel, Archipelago, L.L.C., dated July 13, 
2001 (``Archipelago Letter''); and Eugene A. Lopez, Senior Vice 
President, Nasdaq Stock Market, Inc., dated August 15, 2001 
(``Nasdaq Letter'').
    \6\ See letter from John Boese, Assistant Vice President, Legal 
and Regulatory, BSE, to Katherine England, Assistant Director, 
Division of Market Regulation, SEC, dated October 3, 2001 
(``Amendment No. 2''). In Amendment No. 2, the Exchange clarified 
language in the rule text and deleted a sentence in proposed Section 
3 that required that transactions that could not be submitted to ACT 
be reported to the NASD's Market Regulations Department. According 
to BSE, this sentence was deleted because it reflected a NASD 
requirement that does not apply to UTP exchanges.

---------------------------------------------------------------------------

[[Page 54040]]

II. Description of the Proposal

    The Exchange proposes to trade certain over-the-counter (``OTC'') 
securities. i.e., Nasdaq securities, on the floor of the Exchange, 
pursuant to UTP under Section 12(f) of the Act.\7\ Therefore, to 
accommodate these new securities on the Exchange floor, the Exchange 
proposes to add Chapter XXXV, Trading in Nasdaq Securities, to the 
Rules of Board of Governors of the Boston Stock Exchange (``BSE 
rules''). The rules set forth in Chapter XXXV specifically govern the 
trading of Nasdaq securities, with references to various sections of 
other BSE Rules relating to the trading of equity securities, as well 
as references to selected NASD rules, where appropriate. In addition, 
the BSE proposes a stock allocation program for Nasdaq securities, 
which phases out over a two year period.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 781(f).
---------------------------------------------------------------------------

III. Summary of Comments

    The Commission received two comments on the proposed rule 
change.\8\ One commenter supported the proposal.\9\ One commenter 
requested that the comment period be extended and requested 
clarification of certain issues.\10\ BSE submitted a letter responding 
to Nasdaq's question.\11\
---------------------------------------------------------------------------

    \8\ See note 5 supra.
    \9\ See Archipelago Letter.
    \10\ See Nasdaq Letter.
    \11\ See letter to Adena Friedman, Senior Vice President, Data 
Products, Nasdaq, from George W. Mann, Senior Vice President and 
General Counsel, BSE, dated August 29, 2001.
---------------------------------------------------------------------------

    In its letter, Nasdaq requested further clarification of BSE's 
proposed Section 4(c), which permits specialists to switch from 
automatic execution to manual execution in unusual trading situations 
and how this section relates to BSE's intention to participate in the 
Nasdaq National Market Execution System (``SuperSoes'').\12\ Moreover, 
Nasdaq believed that the reference to ``price volatility'' to be vague 
and did not clearly define when a BSE specialist could turn off the 
auto-execution functionality. Finally, Nasdaq questioned whether BSE 
specialists were planning on quoting away from the BBO because Nasdaq 
believed that such practices may result in BSE specialists' de facto 
withdrawal from the market.
---------------------------------------------------------------------------

    \12\ According to Nasdaq, participants in SuperSoes are required 
to provide automatic execution when they are at the BBO.
---------------------------------------------------------------------------

    The BSE responded that specialists will only be permitted to turn 
off the auto-execution functionality on their workstation in rare 
circumstances, such as following a regulatory halt. Further, the 
Exchange stated that its surveillance and front desk floor operations 
departments will protect against unwarranted and unfettered use of the 
ability to switch to manual execution. Specifically, the Exchange 
stated that a specialist will be required to get the approval of two 
floor officials to request that the auto-execution functionality be 
turned off and that the ability to switch to manual mode rests solely 
with the Exchange's surveillance and front desk floor operations 
departments. The Exchange, therefore, believed that the ability to 
switch to manual mode will not result in a de facto withdrawal from the 
market because it will be used only in extreme situations and will be 
controlled by the Exchange.
    Nasdaq also requested information regarding BSE's audit trail 
requirements. BSE responded that as a part of the Intermarket 
Surveillance Group (``ISG''), all quotes and trades from the Exchange 
are captured by ISG's PATRINA system, which establishes an audit trail. 
The BSE also noted that the Exchange would be reporting its Nasdaq 
trades through ACT, which should further enhance the audit trail for 
BSE trades.
    Nasdaq requested information regarding BSE's enforcement and 
surveillance capabilities regarding trading of Nasdaq securities. BSE 
noted that it had submitted its procedures to the Commission's Office 
of Compliance Inspections and Examinations for review.
    Nasdaq also noted that BSE's examination and qualification requires 
are different than those applicable to Nasdaq market makers and 
requested information on how BSE intends to ensure that its members 
have a thorough understanding of the trading of Nasdaq securities. BSE 
responded that it had modified its floor examination to include 
sections relating to Nasdaq trading. Further, BSE noted that, although 
not required, every specialist who will be trading Nasdaq securities on 
the Exchange upon commencement of the process has voluntarily taken and 
passed the NASD Series 55 exam relating to the trading of Nasdaq 
securities, as well as the Series 63, NASAA Uniform State Law 
Examination.
    Finally, Nasdaq questioned whether BSE would voluntarily comply 
with NASD Rule 4613 regarding locked/crossed markets before the open. 
BSE responded that it would not be trading before the opening.

IV. Discussion

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and in particular, with the requirements of Section 6(b)(5) of the 
Act.\13\ The Commission believes that BSE's proposal to trade Nasdaq 
securities should promote competition, consistent with Section 6 of the 
Act.\14\ In addition, the Commission believes that BSE has proposed 
rules that should ensure that trading in Nasdaq securities on its floor 
occurs in an orderly fashion, consistent with the requirements of the 
Act. The Commission, therefore, believes that the proposal should 
remove impediments to and perfect the mechanism of a free and open 
market in a manner that is consistent with the protection of investors 
and the public interest.\15\ The Commission also notes that BSE's 
responses to the comments raised in the Nasdaq letter were 
sufficient.\16\
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 15 U.S.C. 78f.
    \15\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \16\ The Commission notes that proposed Section 28 of the BSE's 
rules, Short Sales, does not require an exemption form the 
Commission's short sales rule, Rule 10a-1, since Nasdaq securities 
currently are excluded from the Rule. See 17 CFR 240.10a-
1(a)(1)(ii). However, Nasdaq has applied to become a national 
securities exchange. See Securities Exchange Act Release No. 44396 
(June 7, 2001), 66 FR 31952 (June 13, 2001). If Nasdaq becomes a 
registered exchange, Nasdaq securities will be exchange listed and 
subparagraph (ii) of Rule 10a-1 will no longer be available. 
Accordingly, BSE specialists trading Nasdaq securities would be 
subject to Rule 10a-1 unless BSE obtains an exemption from the Rule. 
Nasdaq has requested an exemption from Rule 10a-1.
---------------------------------------------------------------------------

    Furthermore, the proposed rule change is consistent with Section 
12(f)(2) of the Act,\17\ which grants the Commission explicit authority 
to approve UTP in OTC securities. Section 12(f)(2) of the Act requires 
the Commission, prior to approving UTP, to determine that the granting 
of UTP is consistent with the maintenance of fair and orderly markets 
and the protection of investors. The Commission believes that the 
proposed rule change is consistent with these goals and thus, the 
Commission is approving the proposed rule change, subject to the BSE 
complying with the requirements of the OTC/UTP Plan.\18\
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 781(f)(2).
    \18\ The OTC/UTP Plan refers to the Joint Self-Regulatory 
Organization Plan Governing the Collection, Consolidation, and 
Dissemination of Quotation and Transaction Information for Exchange-
Listed Nasdaq/National Market System Securities and for Nasdaq/
National Market System Securities Traded on Exchanges on an Unlisted 
Trading Privileges Basis. The Commission notes that on August 29, 
2001, BSE became a full participant in the OTC/UTP Plan. The other 
participants of the OTC/UTP Plan are the American Stock Exchange 
LLC, the Chicago Stock Exchange, Inc, the Cincinnati Stock Exchange, 
Inc., the National Association of Securities Dealers, Inc., the 
Pacific Exchange, Inc, and the Philadelphia Stock Exchange, Inc.

---------------------------------------------------------------------------

[[Page 54041]]

    Finally, the Commission finds good cause to accelerate approval of 
Amendment No. 2 to the proposed rule change prior to the thirtieth day 
after the date of publication in the Federal Register. The Commission 
notes that Amendment No. 2 merely clarifies the rule language and 
deletes inapplicable language. The amendment, therefore, does not 
substantively change the meaning or intent of the proposed rule change. 
For these reasons, the Commission believes that good cause exists, 
consistent with Sections 6(b)(5) \19\ and 19(b) \20\ of the Act, to 
approve Amendment No. 2 to the proposed rule change on an accelerated 
basis.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78f(b)(5).
    \20\ 15 U.S.C. 78s.
---------------------------------------------------------------------------

V. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether Amendment No. 2 
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-2001-01 and should be 
submitted by November 15, 2001.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-BSE-2001-01), as amended, is 
approved.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-26864 Filed 10-24-01; 8:45 am]
BILLING CODE 8010-01-M