[Federal Register Volume 68, Number 152 (Thursday, August 7, 2003)]
[Notices]
[Pages 47113-47116]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-20129]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48271; File No. SR-BSE-2003-13]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Boston Stock Exchange, Inc. Relating to the Initial 
Allocation Plan for the Proposed Boston Options Exchange Facility

August 1, 2003.
    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 July 30, 2003, 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. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The BSE proposes to add new Chapter XXXVII for the purpose of 
setting forth an Initial Allocation Plan for the proposed Boston 
Options Exchange facility (``BOX'').\3\ Proposed new language is 
italicized.
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    \3\ See Securities Exchange Act Release No. 47186 (January 14, 
2003), 68 FR 3062 (January 22, 2003) (SR-BSE-2002-15).
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* * * * *

Chapter XXXVII

Boston Options Exchange, Inc.

Initial Class Allocation--Parameters and Criteria
    Sec. 1. In order to manage the initial allocation of classes for 
the proposed Boston Options Exchange (``BOX''), the BSE intends to 
launch trading on the proposed BOX market for the top 250 classes (as 
determined by OCC volume statistics). 1886 assignments will be 
allocated first, to be phased in for trading during the first three 
months following the launch date. The remaining assignments within the 
initial 250 classes will be allocated on a class by class basis during 
the following three months.
    (a) Parameters. The following categories and criteria are the basis 
for the initial allocation process.

 
----------------------------------------------------------------------------------------------------------------
                                                                   Number of
                   Category                       Ranking of     market makers   OCC average daily volume  (No.
                                                    classes        per class              of contracts)
----------------------------------------------------------------------------------------------------------------
A.............................................               1              12  100,000.
B.............................................             2-6              12  50,000 to 99,999.
C.............................................            7-11              12  25,000 to 49,999.

[[Page 47114]]

 
D.............................................           12-53              12  10,000 to 24,999.
E.............................................          54-106              10  5,000 to 9,999.
F.............................................         107-250               5  Less than 5,000.
----------------------------------------------------------------------------------------------------------------

    The names and ranking of the 250 classes to be listed at launch are 
based on OCC volume.
    (b) Criteria to determine firm experience. In order to ensure 
market quality, some appointments in each class will be allocated to 
``experienced'' firms. The following criteria will be used as 
consideration to determine which market making firms qualify as 
experienced:
    (1) The applicant has been a market maker or specialist on an 
organized fully automated market on a minimum of 50 classes for at 
least 6 months;
    (2) The applicant has sufficient capital committed to its options 
activities to effectively support an automated market in BOX, as 
determined by the Exchange.
    (c) Any applicant denied any privilege under the provisions of this 
Chapter XXXVII, including denial of acceptance as an ``experienced'' 
market maker, may appeal such decision according to the procedures set 
forth in Chapter XXX, Disciplining of Members, Denial of Membership.
Allocation process
    Sec. 2. Subject to an applicant's approval as an Options 
Participant and a Market Maker on the BOX Market, the BSE will allocate 
classes based on the procedures set forth in this Section 2.
    The model is based on the allocation of assignments sequentially by 
way of two rounds. This process will ensure that all firms will get a 
fair share of assignments while ensuring market quality by giving some 
priority to experienced firms. The allocation will be controlled by the 
Exchange using a random lottery program (the ``program'').
    (a) Round 1--allocate assignments to experienced firms. In the 
first round, 50% of all assignments will be available for allocation to 
experienced firms from categories A, B, C, D and E, and 40% of 
assignments will be available from category F. Accordingly, a total of 
871 assignments will be allocated to experienced firms. If for a given 
class, the number of assignments available for the first allocation is 
smaller than the number of assignments requested by the firms who 
qualify as experienced, a lottery program will be used whereby the 
names of all experienced firms requesting the class will be put in a 
pool, and the names will be drawn one by one until the assignments 
available on the class for this round are exhausted.
    (b) Round 2--allocate remaining assignments. All applicants will 
participate in this round during which a total of 1,015 assignments 
will be allocated. On classes where the demand is smaller than or equal 
to the number of assignments available for the first allocation, all 
firms requesting an assignment will be allocated. On classes where the 
demand is greater than the number of assignments available for the 
first allocation, the lottery program will be used whereby the names of 
all firms requesting the class (including experienced firms which did 
not receive the allocation as a result of Round 1) will be put in a 
pool, and the names will be drawn one by one until the assignments 
available on the class for this round are exhausted
    (c) Priority for subsequent assignments. In order to establish 
priority between applicants not having received appointments for the 
first allocation period, the process will continue until all the 
candidates have been drawn, and a waiting list has been established. 
This order of priority on the waiting list will be used in order to 
allocate new assignments as they become available within 6 months 
following the launch date, or if a selected market maker decides to 
withdraw.
Initial Class Allocation Process Deposit
    Sec. 3. In order to ensure that applicants are not overbidding to 
maximize the number of posts they will be allocated in the initial 
allocation and to ensure their commitment to make market on their 
requested assignments, a deposit will be required from each market-
making firm immediately prior to the allocation lottery. The funds 
received from each market making firm will be deposited into a separate 
account maintained by the Exchange specifically for this purpose. 
Commencing on the launch date of the proposed BOX, deposits for those 
assignments that become live (i.e. available for a market maker to 
trade on BOX) will be released to BOX and be: (a) nonrefundable, (b) 
considered as pre-paid fees, and (c) credited against applicant's BOX 
account to offset trading, technology and other related fees and 
charges. Before any class becomes live for a particular market maker, 
if the applicant notifies the Exchange that the applicant wishes to 
drop any allocated classes, the BSE will refund 50% of the related 
deposit. If an applicant does not receive an allocation in any 
requested class as a result of the initial allocation process, the 
deposit for those classes not allocated will be refunded to the 
applicant within fifteen (15) days of the date of the allocation 
process.
    The deposit required for each class will be determined based on the 
ranking of the class, as categorized in Section 1 of this Chapter 
XXXVII, as follows:
    Category A--$45,000 per class
    Category B--$9,000 per class
    Category C--$6,000 per class
    Category D--$2,250 per class
    Category E--$750 per class
    Category F--$300 per class.
Expiration
    Sec. 4. The Allocation Process set forth in Sections 1-3 of this 
Chapter XXXVII, will expire no later than six months beyond the initial 
launch date of the proposed BOX market.
* * * * *

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.

[[Page 47115]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to add new Chapter XXXVII to its Rules of the 
Board of Governors of the Boston Stock Exchange, Inc. The purpose of 
the new chapter will be to set forth the Allocation Process for BOX 
Market Maker \4\ appointments and accompanying deposit requirements 
related to the launch of the proposed Boston Options Exchange 
(``BOX''), an options trading facility of the Exchange currently being 
proposed.
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    \4\ See proposed BOX Rules, Chapter I, General Provisions, Sec. 
1(a)(31) (definition of ``Market Maker'').
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    The proposed BOX market model provides for an ``open'' policy where 
the goal is to have no restrictions on the number of market makers 
assigned per class. To properly manage the launch of the initial 250 
classes, BOX will request that prospective market maker firms declare 
their interest for market making assignments. BOX will fully allocate 
all the assignments requested by the market maker firms within 6 months 
of the start date of the proposed BOX market (``initial allocation'').
    Nevertheless, as with any exchange venture the size and complexity 
of the proposed BOX, prudence requires that the rollout of trading 
occur in a planned and controlled manner that will ensure the 
maintenance of a fair and orderly market. In this regard, BOX intends 
to phase in trading, during the first three months following the launch 
date, the 250 classes with 1,886 assignments allocated first. Then, any 
remaining assignments will be assigned on a class-by-class basis during 
the following three months.
    Accordingly, a market maker class allocation plan is necessary to 
manage the rollout, and to select on a fair and transparent basis the 
assignments that will be initially allocated. The process will be 
managed by the BSE.
    The following categories and criteria are proposed for the initial 
allocation process:

 
----------------------------------------------------------------------------------------------------------------
                                                                   Number of
                   Category                       Ranking of     market makers  OCC average daily volume ( of contracts)
----------------------------------------------------------------------------------------------------------------
A.............................................               1              12  100,000.
B.............................................             2-6              12  50,000 to 99,999.
C.............................................            7-11              12  25,000 to 49,999.
D.............................................           12-53              12  10,000 to 24,999.
E.............................................          54-106              10  5,000 to 9,999.
F.............................................         107-250               5  Less than 5,000.
----------------------------------------------------------------------------------------------------------------

    The names and ranking of the 250 classes to be listed at launch are 
based on OCC volume.
    Furthermore, in order to ensure market quality, the model proposes 
to allocate in priority some appointments in each class to experienced 
firms. The following criteria will be used as consideration to 
determine which market making firms qualify as experienced:
    1. Have been a market maker or specialist on an organized fully 
automated market on a minimum of 50 classes for at least 6 months; and,
    2. Have sufficient capital committed to its options activities to 
effectively support an automated market in BOX, as determined by the 
BSE.
    Subject to an applicant's approval as an Options Participant \5\ 
and a Market Maker on the BOX Market, the BSE will allocate classes 
based on the procedures set forth in the proposed allocation plan 
model. The model is based on the allocation of assignments sequentially 
by way of two rounds. This process will ensure that all firms will get 
a fair share of assignments while ensuring market quality by giving 
some priority to experienced firms. The allocation will be run by the 
BSE using a random lottery program (the ``program'') developed by BOX, 
and externally audited to verify its integrity, neutrality and 
fairness.
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    \5\ See proposed BOX Rules, Chapter I, General Provisions, Sec. 
1(a)(39) (definition of ``Options Participant'').
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    Round 1--allocate assignments to experienced firms. The first round 
provides for the allocation to experienced firms of 50% of all 
assignments available for the first allocation in categories A, B, C, D 
and E, and 40% of assignments available for the first allocation in 
category F. Accordingly, a total of 871 assignments will be allocated. 
If for a given class, the number of assignments available for the first 
allocation is smaller than the number of assignments requested by the 
firms who qualify as experienced, the lottery program will be used. The 
program will work based upon the following principles: the names of all 
experienced firms requesting the class will be put in a pool; and the 
names will be drawn one by one until the experienced assignments 
available on the class for this round are exhausted.
    Round 2--allocate remaining assignments. All applicants will 
participate in this round during which a total of 1,015 assignments 
will be allocated. On classes where the demand is smaller than or equal 
to the number of assignments available for the first allocation, all 
firms requesting an assignment will be allocated. On classes where the 
demand is greater than the number of assignments available for the 
first allocation, the lottery program will be used. The program will 
work based upon the following principles: the names of all the firms 
requesting the class, including experienced candidates not selected in 
Round 1, will be put in a pool; and the names will be drawn one by one 
until the assignments available for the first allocation on the class 
are exhausted.
    To establish priority between applicants not having received 
appointments in this first allocation, the process will continue until 
all the applicants have been drawn and a waiting list is established. 
This order of priority on the waiting list will be used in order to 
allocate new assignments as they become available within 6 months 
following the launch date, or if a selected market maker decides to 
withdraw.
    To ensure that firms are not overbidding to maximize the number of 
posts they will be allocated in the first allocation and to ensure 
their commitment to make markets on their requested assignments, a 
deposit will be required from each market-making firm immediately prior 
to the allocation

[[Page 47116]]

lottery. The funds received from each market making firm will be 
deposited into a separate account maintained by the BSE specifically 
for this purpose. Commencing on the launch date of the proposed BOX, 
deposits for those assignments that become ``live'' (i.e. available for 
a particular market maker to trade on BOX) will be released to BOX and 
be: (a) nonrefundable, (b) considered as pre-paid fees, and (c) 
credited against applicant's BOX account to offset trading, technology 
and other related fees and charges. Before any class becomes live for a 
particular market maker, if the applicant notifies BOX that he wishes 
to drop certain allocated classes, BOX will refund 50% of the related 
deposit. If an applicant does not receive an allocation in any 
requested class as a result of the initial allocation process, the 
deposit for those classes not allocated will be refunded to the 
applicant within fifteen (15) days of the date of the allocation 
process. The deposit amounts will vary for each class in the following 
manner: Category A $45,000 per class, Category B $9,000 per class, 
Category C $6,000 per class, Category D $2,250 per class, Category E 
$750 per class, Category F $300 per class. For example, if a firm 
applies to be market maker on all of the 250 classes to be listed at 
launch, the required deposit will be $297,450.
    Due to the fact that this proposed allocation plan is deemed to be 
a temporary process specifically designed to control the launch of the 
proposed BOX market, the Exchange is seeking approval of this proposal 
for a limited time, and will not, in any case, utilize this process, as 
currently set forth, any later than six months beyond the initial 
launch date of the BOX market.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements under Section 6(b) of the Act,\6\ in general, and 
furthers the objective of Section 6(b)(5) of the Act,\7\ in particular, 
in that it is designed to prevent fraudulent and manipulative acts and 
practices, 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 transaction in securities, to remove impediments to and 
perfect the mechanism for a free and open market and a national market 
system, and, in general, to protect investors and the public interest.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 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 did not solicit or receive 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 filings will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-BSE-2003-13 and 
should be submitted by August 28, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-20129 Filed 8-6-03; 8:45 am]
BILLING CODE 8010-01-P