[Federal Register Volume 67, Number 81 (Friday, April 26, 2002)]
[Notices]
[Pages 20852-20854]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-10310]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45791; File No. SR-BSE-2001-08]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Boston Stock Exchange, Inc. 
Relating to Competing Specialists and the Execution of Directed Agency 
Orders

April 19, 2002.
    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 December 21, 2001, 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. On April 
19, 2002, the Exchange submitted Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit

[[Page 20853]]

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 A. Boese, Assistant Vice President, 
Legal and Regulatory, BSE, to Belinda Blaine, Associate Director, 
Division of Market Regulation, SEC, dated April 18, 2002 
(``Amendment No. 1''). In Amendment No. 1, the BSE removed from the 
proposed rule change all references to a new defined term, 
``Professional Agency Order.''
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend certain sections of its rules 
related to Competing Specialists (as defined in BSE Rules, Chapter XV, 
Dealer Specialists, Section 18, Procedures for Competing Specialists) 
and the execution of directed agency orders. The text of the proposed 
rule change is below. Proposed new language is in italics; proposed 
deletions are in brackets.
* * * * *
Chapter XV
Dealer Specialists
Procedures for Competing Specialists
Sec. 18
    * * * 6. The [receiving] specialist/competing specialist is 
responsible for all orders directed to him/her.
* * * * *
    9. * * * However, [the regular specialist will be responsible for 
updating quotations; thus all competitors must communicate their 
markets to the regular specialist and] all specialists must be 
responsible for their portion of the published bid and/or offer, and 
the BEACON System will update quotations accordingly.
    10. Because there is only one Exchange market in a security subject 
to competition, all limit orders sent to the Exchange will be 
maintained by the BEACON System's central limit book and will be 
executed strictly according to time priority as to receipt of the order 
in the BEACON System, irrespective of firm order routing procedures. 
This rule shall not be applicable where the quotation on the book is 
for the account of a specialist/competing specialist and another 
specialist/competing specialist has received an order directed to him. 
In such event, the specialist/competing specialist can elect to execute 
the order for his own account at the same price as the other 
specialist/competing specialist's order, or a better price, or to 
permit the order to be executed against the specialist/competing 
specialist's quotation.
* * * * *

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 IV 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
    In today's competitive marketplace, customers and market makers 
have an increasing number of venues for the trading of listed 
securities. Both customers and market makers are becoming aware of and 
more selective about where their orders are ultimately executed, 
particularly in light of the increased disclosure under recently 
enacted Rule 11Ac1-5 under the Act (``Rule 5'').\4\ This reflects the 
reality that quoting does not, in and of itself, indicate the best 
price within a market center, due to price improvement. Rather, it is a 
combination of several factors which attract orders and comprise order 
routing decisions, such as historical results, added depth, price 
improvement and other factors which serve to enhance best execution 
practices. Accordingly, the Exchange seeks to amend portions of its 
Competing Specialist Initiative Rules (see BSE Rules, Chapter XV, 
Dealer Specialists, Section 18, Procedures for Competing Specialists) 
to allow, under certain conditions, for the altering of priority of 
specialist/competing specialist principal quotations when orders are 
directed by a customer to another specialist/competing specialist. 
Under this proposal, it should be noted that all non-directed and 
Intermarket Trading System (``ITS'') orders will continue to be routed 
according to existing competing specialist rules.
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    \4\ 17 CFR 240.11Ac1-5.
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    The reasons behind this request are threefold. First, the proposal 
will enable Exchange specialists to effectively compete with other 
exchanges and market centers amidst recent changes in the competitive 
landscape. This is particularly true in light of (a) Nasdaq's proposed 
rules in their recent Form 1 exchange registration filing, (b) the 
various order routing scenarios set forth in the Nasdaq SuperMontage 
environment,\5\ (c) the Philadelphia Stock Exchange's recently adopted 
rules in relation to the directing of orders,\6\ and (d) the current 
preferencing model in place on the Cincinnati Stock Exchange (see CSE 
Rule 11.9). Second, the proposed rule amendment will reward specialists 
who are able to attract orderflow directed to them. Hence, it will 
increase competition in the marketplace, which carries an inherent 
benefit to investors. Third, the proposal supports the initiative of 
Rule 5 as it will improve the ability of order sending firms to better 
identify and direct orders to those venues that their customers demand 
as a result of the increased visibility of execution practices under 
the Rule.
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    \5\ See Exchange Act Release No. 43863 (January 19, 2001), 66 FR 
8020 (January 26, 2001).
    \6\ See Exchange Act Release No. 45183 (December 21, 2001), 67 
FR 118 (January 2, 2002).
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    Presently, Chapter XV, Dealer Specialists, Section 18, Procedures 
for Competing Specialists, Paragraph 10, sets forth that all limit 
orders sent to the Exchange will be executed strictly according to time 
priority as to receipt of an order in the Boston Exchange Automated 
Communication and Order Routing Network (``BEACON'') system, 
irrespective of firm order routing procedures. This would continue to 
be the case for all customer orders. However, the proposed rule 
amendment would allow specialists/competing specialists to execute an 
order that has been directed to him, at the same or better price as the 
prevailing national best bid and offer (``NBBO''), if the BSE quotation 
is for the account of another specialist/competing specialist.
    Accordingly, the Exchange seeks to amend Chapter XV, Dealer 
Specialists, Section 18, Procedures for Competing Specialists, 
Paragraph 10, of its Rules by adding an exception for orders directed 
to a specialist/competing specialist. The exception will allow the 
specialist/competing specialist who receives such an order to elect to 
execute the order for his own account at the same NBBO price or better 
than the quotation on the book, if the quotation on the book is for the 
account of another specialist/competing specialist, or to permit the 
directed order to execute against the prevailing specialist/competing 
specialist's quotation.\7\ Furthermore, certain other paragraphs of 
Chapter XV, Dealer Specialists, Section 18, Procedures for Competing 
Specialists, will need to be slightly amended in order to remain 
consistent with

[[Page 20854]]

paragraph 10. Namely, Paragraph 6 will need to be amended to reflect 
that all specialist/competing specialists will be responsible for 
orders directed to him/her. Likewise, Paragraph 9 will need to be 
amended to reflect certain BEACON system changes which will update 
quotations more efficiently, removing the burden from the regular 
specialist.
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    \7\ Where an agency order resides on the book of a specialist/
competing specialist and a specialist/competing specialist then 
receives an executable order routed to him/her, the subsequent 
orders may be price improved by the specialist/competing specialist 
receiving such order, or permitted to match the resident agency 
order at the limit price (without price improvement).
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    In today's BEACON system, an agency order is automatically routed 
to the specialist quote in accordance with price/time priority amongst 
competing specialists if such quote is at the NBBO. Such order routing 
has allowed specialists with orderflow to reduce their costs and 
compete more effectively for public customer business without 
sacrificing quality of executions. However, the economic value of this 
practice has diminished considerably with the introduction of a number 
of Commission led initiatives in recent years, particularly the 
introduction of decimalization. Implementation of the proposed rule 
will enable the order to be routed to the designated specialist and 
will enable competing specialists to exercise greater control over more 
of their firm's orderflow and provide price improvement opportunities 
to their customers over existing specialist proprietary quotations. All 
ITS transactions and non-directed orders will continue to be routed 
according to price/time priority, and available for price improvement 
by exposure to the specialists/competing specialists.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of section 6(b) of the Act,\8\ in general, and 
section 6(b)(5) of the Act,\9\ in particular, which requires, among 
other things, that the rules of an exchange be 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, in general, to 
protect investors and the public interest, and not be designed to 
permit unfair discrimination between customers, issuers, brokers or 
dealers.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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.

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 in 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-2001-08 and 
should be submitted by May 17, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-10310 Filed 4-25-02; 8:45 am]
BILLING CODE 8010-01-P